After filing more than 10,000 cases during the past two decades, I decided that it was time to put some of my extensive experience into a written format that would be truly helpful to anyone considering filing bankruptcy in the Western New York region.
Over the years, I have found that most people thinking about bankruptcy will ask remarkably similar questions, such as, “Will I be able to keep my house and car?” “Will I have enough debt to qualify for bankruptcy?” “What are the different kinds of bankruptcy?” “Will I be able to obtain credit after bankruptcy?” These are just a few of the dozen questions that I am asked pretty much every day.
During the course of a one hour consultation, it can be very difficult to explain the entire bankruptcy process to a client and also pay attention to the specific details of the client’s case. So, after many years of reviewing similar information with many different clients, I decided it would make sense to put together a book outlining the most important parts of the bankruptcy process so that every prospective client can make an informed decision. I encourage every person who is considering bankruptcy to read this book.
When I started out to write this guide, I honestly thought it would be only about 20 to 30 pages long. However, as you can see, the final product is well over 100 pages, and at many points I had to stop myself from including even more information. I realize that bankruptcy is not a very exciting or pleasant topic for anyone, but I truly believe that if you understand the process before you first meet with an attorney, you will be much more comfortable with it. Instead of asking general questions about bankruptcy, you will be able to pose very detailed questions about your case.
I have reviewed the website of many other attorneys in the Western New York area. While most websites may devote a page or two to discussing general information about bankruptcy, not a single website appears to provide the comprehensive, detailed information that a potential client should have, to be able to make an informed decision about whether bankruptcy is right for him/her. My goal in providing you with this free e-book is twofold; first, to provide you with a current, detailed description of the entire bankruptcy process, and second, to offer you the added insight of how the bankruptcy process specifically applies to the Western New York region.
While many people think that the bankruptcy process is the same all over the country, this is really not true. Each court (and even each judge) has a slightly different “take” on the bankruptcy process. Also, the level of scrutiny to which a given case will be subject varies significantly from district to district. The goal of this book is to cover not only general bankruptcy issues, but also to review the manner in which bankruptcies are actually handled in the Buffalo and Rochester regions. If you live in any of the 15 counties of Western New York, this guide will give you more information about the bankruptcy process than any other available source.
WHAT IS BANKRUPTCY?
Bankruptcy is a process established under federal law that allows individuals or businesses to reorganize or eliminate debt. The concept of bankruptcy has been around for hundreds of years. In fact, it is important enough that the drafters of the United States Constitution decided to include a specific reference to bankruptcy in the final draft.
The Bankruptcy Laws have undergone significant changes over the years, mostly to keep up with the various types of debts or financial problems prevalent to the time period. For example, in the early 1980s, the bankruptcy laws were amended to allow the modification of certain high-interest-rate mortgages. This was to address the problem that many homeowners were experiencing in having their mortgage payments “called” by their mortgage lender. Most homeowners were not in a position to pay off their mortgages at once, and the Chapter 13 laws were expanded to allow a homeowner to extend their balloon payment for up to five years.
In more recent years, the focus of the bankruptcy laws has been on consumer indebtedness, most particularly unsecured credit cards and personal loans. Without question, the significant rise in bankruptcy filings during the 1990s was due to the widespread availability of unsecured credit to virtually every American. While people will argue for decades whether the credit crisis of the past few years was caused by overspending by consumers, or by over lending by the banks, the fact is that bankruptcies have been on the rise for nearly two decades. Bankruptcy filings peaked in 2005, just before a major overhaul of the bankruptcy laws.
While many people believe that bankruptcy ceased to exist in 2005, this common misperception was, and is, absolutely untrue. Although, initially, bankruptcy filings did significantly decrease in response to the Courts’ interpretations of the new bankruptcy laws enacted at the time, statistics subsequently confirmed that, by 2009, bankruptcy filings had once again surpassed the one million per year mark. Even with the more restrictive provisions contained in the new bankruptcy laws, people still found themselves burdened with overwhelming amounts of unsecured debt. Debt problems have been compounded by the uncertainty in the job market, skyrocketing health and fuel costs, and the increasing burdens of student loans placed upon younger members of our society.
Although bankruptcy is a legal process, it is not typically adversarial. In most cases, creditors do not oppose the filing of bankruptcy cases because they recognize that the people filing bankruptcy cannot afford to pay the debts due to unforeseen circumstances, such as job loss, illness, or divorce. Even in cases where bankruptcies are caused by overspending, the creditors recognize that there is not much that they can do to collect the debts given the bankruptcy filer’s financial situation.
A bankruptcy case is commenced by the filing of a bankruptcy petition with the United States Bankruptcy Court. The bankruptcy petition is about 30 pages long and contains very detailed information about the filer’s assets, liabilities, income, expenses and recent financial history. The bankruptcy petition is intended to give your creditors and the Court an idea of your present financial situation and the circumstances leading up to your bankruptcy filing.
After the filing of the bankruptcy case, a trustee is appointed to review your bankruptcy petition and meet with you to ask questions. In a Chapter 7 case, this meeting with the trustee lasts about 10 minutes, and if there are no problems in the case, it is the only interaction you are likely to have with anyone other than your own lawyer. You will never have to appear in front of the Bankruptcy Court in a Chapter 7 case, except in the most extreme situations. In a Chapter 13 case, there is also a case trustee appointed by the Court, who will meet with you after the filing of the bankruptcy. While you will have to appear before the Bankruptcy Judge, this is not a particularly stressful situation and in most cases takes no more than about 10 minutes.
The most important part of your involvement in the bankruptcy process is the preparation of the bankruptcy petition and making sure that your attorney has all of the necessary information to file your case.
WHEN SHOULD PEOPLE FILE BANKRUPTCY?
I have represented clients from literally all walks of life. My clients have included doctors, lawyers, school teachers, government employees, police officers, firemen, factory workers, salespeople, service industry employees, and even collection agents (ironically, for all the harassment they cause people with debt problems, collection agents often are paid so little that they cannot pay their own debts). I realize that most people try to resolve their debt problems on their own (for example, by enrolling in credit counseling or debt settlement programs) before talking to a bankruptcy attorney. However, if you are confronted by financial problems, you should learn more about the bankruptcy process before making any final decisions.
I believe strongly in the bankruptcy process. In my opinion, it simply is not
true that bankruptcy hurts the economy. In fact, I believe the opposite to be true. When people are just making minimum payments on their credit cards, they are doing nothing but putting interest payments in the hands of the shareholders who own the credit card companies. Basically, they are making the rich even richer. After filing Chapter 13 or Chapter 7 bankruptcy, people have the money available to purchase items that truly drive economic growth, such as homes, automobiles, clothing, furniture, etc.
In some cases, the need to file bankruptcy is caused directly or indirectly by
a life altering event, such as job loss, illness or divorce. In other cases, there may indeed be some element of financial mismanagement, which is in large part caused by the lack of adequate financial education at the high school and college level. In my opinion, the accumulation of credit card debt is very much the fault of the credit card companies that have deliberately misled people into believing that they are financially solvent if they are able to make minimum payments on credit cards. The reality is that a person who can only afford minimum payments is probably no more than just a few paychecks away from bankruptcy. The statistics I have studied show that for every person who files bankruptcy, there are probably seven others who have significant financial problems. If this figure is accurate, it means that at any given point, there are as many as 10,000,000 people in the United States who are in serious financial trouble.
Once debt is created, it either has to be paid or eliminated. It cannot simply be ignored. You cannot allow feelings of pride, ideology or morality to stop you from making practical decisions in your life. It is completely normal for you to have regret, sadness and embarrassment about decisions (financial or otherwise) you have made in the past. However, it is much more important that you learn from your mistakes than that you torment yourself for them. You are legally and morally entitled to be relieved of your debt when you cannot pay it. That is why the bankruptcy laws exist. Use the laws to help you move forward in your life.
HOW THIS BOOK IS ORGANIZED
My idea in organizing this book was to take the prospective client through all steps of the bankruptcy process. As indicated above, the most important step is the preparation of the bankruptcy petition, and this requires significant communication between the client and the attorney regarding the client’s assets, income, and other information. Therefore, the first four chapters of this book deal exclusively with the actual contents of the bankruptcy petition. Chapter 1 covers all of the assets that most individuals are likely to own and describes how each asset is treated in the bankruptcy process. Chapter 2 covers the different types of debts that people owe. Chapters 3 and 4 address the household budget and the information that has to be disclosed about your relationship with your creditors during at least the two years prior to your bankruptcy filing.
Chapter 5 takes you through the actual process of filing bankruptcy, from the date of your first consultation with the attorney until the actual filing of your bankruptcy case. This Chapter provides information about the process of hiring an attorney and the general costs involved in a bankruptcy filing. It explains how the client and attorney must cooperate in preparing the bankruptcy petition so that it is as accurate and detailed as possible when it is filed in the Court.
Chapter 6 discusses the general procedures applicable for all bankruptcy cases, and Chapter 7 (appropriately titled) covers the specific procedure for Chapter 7 cases, including interaction with the trustee appointed in your case and the steps necessary to obtain your bankruptcy discharge. It also explains the difference between cases where all assets are protected from creditors (the vast majority) and those cases where creditors may receive a distribution as the result of the trustee’s selling a non-essential asset that you may own. Finally, the Chapter talks about the different kinds of debts that cannot be discharged in a Chapter 7 case.
Chapter 8 deals solely with the Chapter 13 process. It explains in detail the reasons why people typically file Chapter 13 rather than Chapter 7. It explains the content of the Chapter 13 plan and how the plan is presented to the Court and your creditors. It also reviews the types of problems that typically arise after confirmation of a bankruptcy case, such as a change in income or problems with particular creditors. This chapter discusses the steps necessary to obtain a bankruptcy discharge and, as in a Chapter 7 filing, specifies which debts cannot be eliminated.
Chapter 9 discusses life after bankruptcy. It explains why people are likely to see a much faster improvement in their credit after they have filed a bankruptcy than if they continue to struggle with debt or deal directly with their creditors. It provides information on how your credit score is impacted by different types of financial problems, such as late payments, lawsuits and judgments. Most importantly, this chapter provides you with concrete steps that you can take to improve your credit after the bankruptcy filing. The improvement in a client’s credit rating after a bankruptcy filing is directly related to the effort devoted by the client in paying all debts on time in the future, taking on new credit obligations in a responsible manner, and reviewing the client’s credit report to make sure that the bankruptcy is properly reported in the least damaging way.
YOUR MAIN RESIDENCE
For people that own their own home, the first question usually asked is whether they will be able to keep their home if they file bankruptcy. The answer in almost every case is “Yes.” The exemption laws in New York State are very generous. You are entitled to protect $75,000.00 in equity in your home over and above any mortgage liens and home equity loans. For a married couple filing jointly, the exemption is doubled.
If you file a Chapter 7 bankruptcy, you can keep your home so long as you are current on the mortgage and continue to make the monthly payments. You must also continue to pay any home equity loans. If you are behind on your mortgage when you consult with us, we will discuss options (including Chapter 13) for you to deal with the mortgage arrears.
During the interview process, we are going to go over details regarding your property. The following issues will be reviewed:
1. How the property is titled – In most cases, the property will be owned individually or jointly by the client and their spouse. However, there are many other possible scenarios. For example, the property may be owned jointly by the client and another family member, or it maybe owned jointly by the client and a business partner. It is important that we review the form of ownership, and we will ask you to provide a copy of the deed so that we can verify it.
2. When you purchased the property and how much you paid for it If the property was purchased recently, the purchase price is often a good indicator of its present value. In fact, the purchase price for a recently acquired home tends to be more accurate than the tax assessment. Our goal in reviewing this information is to try to place an accurate value on the property. In cases where the value of the property is not clear, we will ask you to obtain an appraisal or a realtor’s “market analysis” of the property. We can generally put you in touch with a local realtor who can perform a market analysis for you at a very reasonable rate. In most cases, an appraisal is not necessary, so it is certainly not something that you have to obtain prior to meeting with us.
3. Mortgages, home equity loans and home improvement loans Most people have a mortgage against their property. We will ask you to provide us with proof of the mortgage balance, so that we can determine the amount of equity that you have in the property. Remember that most equity is exempt, so the main purpose is simply to provide accurate information to the Court regarding the mortgage. If you have a home equity loan or a second mortgage, we will require proof of the balances on these debts as well. In some cases, people have home improvement loans backed by some type of lien or mortgage. If you bring in your original loan documentation, we can generally tell if there is a lien or not.
4. Monthly mortgage payments, taxes and insurance We review this information because we must prepare a budget that discloses all home-related costs. If the mortgage payment does not contain an escrow component, we will ask you to provide copies of current tax bills, and we will divide the annual tax figure by 12. The same holds true for insurance premiums.
5. Whether you are current on the mortgage and taxes Hopefully, all of your payments against the home will be current when you come in to our office. However, if you have fallen behind, relax. In most cases, we can help you deal with the arrears. It is important that you give us accurate information regarding any delinquent mortgage payments or tax payments. We have found that people are sometimes embarrassed to tell us how far behind they really are on their payments. We certainly understand this embarrassment, but we would actually prefer that you overestimate the arrears rather than underestimate. If you need to file a Chapter 13 bankruptcy due to mortgage arrears, the process is similar whether you are one month behind or three years behind. The same is true for delinquent taxes.
6. Whether you have any judgments against you If you have judgments against you, it is very likely that there are judgment liens against your home. This type of lien is similar to a mortgage because, without a bankruptcy filing, you cannot sell or refinance the property without paying it. However, whether you file Chapter 7 or Chapter 13, it is very likely that we can remove the judgment liens against your property. We do check certain online databases that provide us with judgment information. However, these data sources are not always completely up to date. Therefore, if you even suspect that any of your creditors have obtained a judgment against you, we would like you to bring that to our attention during the meeting.
REAL ESTATE OTHER THAN YOUR HOME
In a significant number of cases, clients own property other than their home. Most commonly, clients own multi-family rental property. However, it is not unusual to meet with clients that own recreational land (such as a hunting camp), unimproved vacant land, or even commercial property. Sometimes, your name may have been placed upon property owned by somebody else for estate planning purposes. For example, we very often meet clients who have been added to the deed by a parent (sometimes without their knowledge). Even though you may not consider this to be “your property,” if the deed is in your name, you definitely have an interest in the real estate that must be reviewed.
There is no specific exemption for real estate other than your home. However, the recent changes to the exemption laws in New York State do leave open the possibility of protecting approximately $10,000.00 in equity in any type of real estate. If the value of the real estate exceeds this, it does not mean that you will lose it. However, you may have to file a Chapter 13 plan to protect the non-exempt equity. This is something that will be reviewed with you in detail.
As with your home, you will have to continue to make mortgage payments and tax payments if you wish to keep the property. If you are behind on these bills, the arrears can be handled in a Chapter 13 plan in essentially the same manner as they would be handled for your home.
CARS, TRUCKS, AND OTHER VEHICLES
A client’s car is often their second most valuable asset. If your bankruptcy is handled correctly, there is absolutely no reason that you will have to give up your car or any other vehicle. During the consultation, we are going to discuss each vehicle that you own and obtain the following information:
1. The year, make and model of the vehicle You will be asked to bring a copy of the vehicle title. The title contains the vehicle identification number, and this helps us identify the exact model and trim for the vehicle. Many vehicles (especially pick-up trucks) have many different trim levels and the values can vary significantly. By looking at the “call number” in the vehicle identification number, we can place a fairly accurate value on the vehicle.
2. Automobile loans We will ask you to provide us with proof of the current payoff balance on the vehicle. Most people do not have much equity in their vehicles. In fact, more often than not, they owe more on the vehicle than it is worth. We also need to verify that the creditor has placed a valid lien on the vehicle. If the lien was properly “perfected,” it will show up on the title.
3. Age of the car loan If your vehicle loan was taken out more than two and a half years ago and the loan balance exceeds the value of the vehicle, it is very possible that we can restructure the vehicle loan in the context of the Chapter 13 plan. Essentially, in a Chapter 13 plan, we can “strip off” the portion of the vehicle loan that exceeds the value. The amount that has to be paid back will often carry a much lower interest rate. The payments can probably be lowered as well.
If you claim the New York exemptions, you can protect up to $4,000.00 in equity in a vehicle. Married couples filing jointly can protect up to $8,000.00 in exempt equity in a vehicle, or if they have two vehicles that are separately titled, they can protect up to $4,000.00 each. Under the Federal exemptions, the exemption is $3,450. However, there is a wild card exemption that may be able to protect the remaining equity in the vehicle.
The vehicle exemption under Federal or State law can also be applied against an operable motorcycle and most other non-tow motor vehicles.
If you file a Chapter 7 bankruptcy and wish to keep a financed vehicle, you will be able to do so, as long as you continue to make the payments and maintain insurance on it.
4. Leases In most lease situations, the vehicle title remains in the name of the financing bank or lender. Regardless of the type of bankruptcy that you file, you will almost certainly be able to keep your leased vehicle so long as you “assume” the lease (which simply means agreeing to abide by the original terms) and so long as you keep up the monthly payments and insure it. If you have a vehicle lease, we will review it during your initial consultation. We will ask you for the details of the lease, including the name of the lender, the term of the lease, and the monthly payment.
In most cases, there is an exemption available to protect your bank accounts. Even if no exemption is available, we can typically give you guidance on how to utilize any non-exempt funds in a way that does not jeopardize your bankruptcy case. It is, therefore, extremely important that we have details regarding all bank accounts that you own. It is helpful if you bring in copies of actual bank account statements for the past 30 to 60 days for each bank account that you own. If you have multiple accounts at a bank, we will need to review each account individually. Accounts at credit unions are also considered bank accounts. In general, if a client has a relationship with a credit union, they have at least two accounts: a “share” account (basically a savings account) and a “draft” account (basically a checking account). There may be other accounts as well, such as vacation or Christmas club accounts.
You should also let us know if your name appears on a bank account with anybody else. You may have an account that you own with a child or an elderly parent. Perhaps your name was placed on an account for power of attorney or estate planning purposes. We have even seen clients whose names remained on accounts with ex-spouses, and this has needlessly caused the ex-spouse to become involved in the bankruptcy case.
STOCKS, BONDS AND INVESTMENT ACCOUNTS
There is no automatic exemption for stocks, bonds or non-retirement investments. However, the Federal “wild card” exemption may be available. Alternatively, it may be advisable for you to liquidate certain types of financial accounts in order to prevent having to turn over the account proceeds to your creditors.
We will review whether you own any stocks. Although this is not common for people filing bankruptcy, there are situations where people own stock in the company for which they work or have simply purchased a few shares in a publicly traded stock. You may also own “stock options” provided by your employer. The options by themselves could have value if the option price is lower than the current trading price. Even if the options are currently worthless, the bankruptcy trustee may continue to monitor the options until they expire.
Many clients own mutual funds or other types of investment accounts that are not retirement based. These are not considered bank accounts and, therefore, the “cash exemption” under New York State law is not available. It is rare that we encounter a client with significant portfolios, but if your name is on any type of mutual fund or investment account, it is definitely something that you should bring to our attention.
United States Treasury Savings Bonds are essentially considered cash and there is an exemption available to protect them in most cases. If you have any savings bonds in your name, even if they do not mature for many years, please discuss this with the attorney.
It is much less common in today’s economy to see clients participating in profit sharing programs. In most cases, these profit sharing plans are exempt, but this depends on whether the profit sharing plan is based upon your age or length of service or, instead, whether it is dependent upon the annual profitability of the company. If it is possible that you will be receiving any type of profit sharing income within the next 12 months, we will discuss this at the first consultation.
There are many different types of retirement accounts. These accounts are almost universally exempt from creditors, even without the filing of a bankruptcy case. The only creditor that typically has the right to take action against your retirement account is the Internal Revenue Service or (maybe) the New York State Department of Taxation and Finance. Even though your retirement assets are almost certainly exempt, we still need to take care in listing all accounts that you own. The most common pension assets are as follows:
1. 401(k) pension plan. These are plans set up by private employers and contain fund deposited by the employee. Sometimes the employer makes “matching contributions.”
2. 403(b) pension plans. These are plans set up by a public or non-profit employer
3. Tier 1, 2, 3 or 4 pension plans. These are retirement plans established by the New York State Retirement System. Almost every employee of a local, county, or state agency has rights under one of these plans.
4. Deferred compensation plans. Most public employees have the option of setting up a Section 457 deferred compensation plan. This allows them to place significant sums of money in tax deferred investments. Even though these are not traditional pensions, they are exempt under both State and Federal law.
5. Defined Benefit Plans. In these plans, the employer sets aside money on your behalf. The amount that you receive is based upon your years of employment and your salary during those years. Once you are eligible to receive retirement benefits, the amount is fixed each month for the rest of your life.
6. Individual Retirement Accounts. These are accounts that are generally set up by the client directly. Although they are not true “pensions,” they are entitled to the same protection in an amount up to $1,000,000.00 under Federal law.
7. Retirement Annuities These are most commonly seen by employees in the State Teachers Retirement System, but they may also be privately purchased. If you own any annuities, it is important that you provide paperwork to establish whether it is a true retirement annuity or one that is not subject to any special tax treatment.
8. Union sponsored pension plans Many construction and trade workers have pension plans set up on their behalf by their union. In many cases, the employer is required to make significant contributions towards union benefits, including pensions. These contributions may or may not appear on your pay stubs each week. If you are participating in a union, it is a good idea to check with your union to determine whether there is a pension plan in place to protect you.
LIFE INSURANCE POLICIES
For several years there was uncertainty in the local courts regarding a client’s ability to exempt certain types of life insurance. However, it is now fairly well settled that even whole life policies with significant cash value are exempt from creditors. Nevertheless, even though the policies are protected, it is important to disclose the existence and ownership of all life insurance policies. We will need to know whether you own the policy, whether it insures your life or someone else’s (for example, you own a policy that insures the life of your spouse or child), the name of the beneficiary, the amount of the death benefit, the cash value of the policy and the whether there are any loans against it. The most common types of life insurance are as follows:
a) Term insurance. These policies do not have any cash value. They simply pay a benefit to your named beneficiary upon your death. Many people have term policies that are provided at no cost by their employer. If you are not sure, you should check with your employer. If you do not have any term policy and are married or have children, we strongly advise you to obtain coverage. Unfortunately, over the years we have learned that most clients are significantly under-insured or have no insurance whatsoever. Remember, that the older you get, the harder it is to obtain insurance. Also, it is always best to obtain life insurance coverage when you are in good health because the rates are lower. If you wait until you become sick or even begin to show symptoms of illness, it may be difficult or impossible to obtain any coverage.
b) Whole life insurance. These policies generally offer better long term protection than term policies because they do not expire at a certain age. They protect you for your entire life, no matter what your age at death. The premiums are significantly higher than term insurance premiums, but your policy does build up cash value.
c) Universal and variable life insurance These policies are similar to
whole life policies but are sometimes set up more for retirement or estate planning purposes. They do contain a death benefit but also, in many cases, give you the option of borrowing against the policy rather than taking income distributions. Upon your death, the beneficiary obtains the policy without any tax consequences to him or her.
OTHER PERSONAL PROPERTY
The good news is that virtually all household furnishings are exempt from creditors under both State and Federal bankruptcy law. For most people, even those assets that are not technically exempt are not worth enough to justify being sold to pay creditors.
During the initial consultation, we are going to review your personal property with you. There are two reasons that great care must be taken in reviewing these assets. First, it is important that your bankruptcy petition be complete and accurate in detailing all of your assets, even those that are clearly protected from creditors. Second, if there is an asset that may not be exempt from creditors, it is better for us to know beforehand so that we can recommend an exemption strategy. At the end of this chapter, we have attached our standard personal property worksheet. We encourage you to complete it and bring it with you to the consultation.
The rest of this chapter will review the basic types of personal property and provide some guidance regarding available exemptions.
Under the New York bankruptcy exemptions, an individual debtor can protect up to $10,000.00 in home furnishings, including furniture, some appliances, a television, kitchenware, and other items. Married couples filing jointly can protect up to $20,000.00 in household furnishings. It is rare to meet a client who has furnishings that value even close to the available exemption limits.
If you rent your apartment or home, it is likely that you posted a security deposit when you signed the lease. You may also have given a security deposit when you started a utility service. These security deposits are technically an “asset.” They must be reported on your bankruptcy petition. They are exempt from creditors.
Televisions, Video Equipment and Computers
Despite the significant changes in the New York bankruptcy laws in 2010, there is still actually very little protection for items such as DVD players, computers, cell phones, video cameras, and other types of electronic devices. However, remember that even if you paid several hundred dollars for one of these items, it is very unlikely that the present fair market value is significant. Also, if you happen to have very valuable video electronic equipment, the Federal wild card exemption can be claimed to protect your assets in almost all cases.
Wedding rings, Engagement Rings and Other Jewelry
This is probably one of the most overlooked areas of personal property. Although wedding rings are exempt in a bankruptcy case, engagement rings are not. It constantly amazes me how few bankruptcy petitions for married couples show ownership of an engagement ring. However, if you own jewelry and do not list it, there is a significant possibility that it will be raised as a question at your first bankruptcy hearing. I have heard many trustees chastise married women for not listing their engagement ring or other jewelry as an asset.
Until recently, there was no exemption that could be claimed for jewelry. However, the wild card exemption can now be applied to protect engagement rings or other jewelry.
It is important that you provide as much detail regarding all types of jewelry, including gold chains, rings, watches. I consider disclosure regarding jewelry as one of the key indicators of the accuracy of a bankruptcy petition prepared by other attorneys. Although it is certainly possible that a client may own no jewelry of any kind, it is not probable. If a bankruptcy petition discloses the ownership of jewelry with significant detail, it is a pretty good bet that all other important areas of the bankruptcy petition have been truthfully and carefully completed. On the other hand, if no jewelry is listed, it raises the possibility that other portions of the bankruptcy petition have not been diligently prepared.
Remember, it is always our goal to present your bankruptcy case in the best possible light. It is rare that we cannot protect your assets, but if you do not disclose an asset and it is discovered later, it is very possible that you will not receive your bankruptcy discharge. The Bankruptcy Court in Rochester has denied a bankruptcy discharge to a bankruptcy debtor solely for failing to disclose the existence of an engagement ring.
Many clients, especially those living in rural areas, own recreational vehicles, such as dirt bikes, all terrain vehicles, snow mobiles, pop-up campers, and jet skis. Until the enactment of the new exemptions in 2010, there was no easy way to protect these assets. However, the Federal wild card exemption can protect any recreational vehicle within certain monetary limits. At the first consultation, we are going to discuss with you the year, make and model of all assets. It is helpful for you to bring registrations, titles, and even the original contracts of sale so that we can properly identify the asset and place an appropriate value on it in your bankruptcy schedules.
Accounts Receivable and Other Debts Owed to You
When we first bring up the topic of receivables with clients, their inclination is to think that we are asking them about business receivables. While certainly you may be owed money by a business customer or client, it is much more common that you are owed money by someone else. For example, you may have had a tenant that owed you rent and had to be evicted. You may have loaned money to a friend or family member. You may be a realtor waiting for a real estate commission check. Essentially, if you are owed money for any reason, this is an asset that has to be disclosed on your bankruptcy schedules.
With the new bankruptcy exemptions, it may be possible to protect some or all of the money that is owed to you for any reason. Under the prior law, it was almost impossible to protect these receivables unless they were directly attributable to earnings prior to the bankruptcy filing.
Receivables are important because, if there are no available exemptions, the Trustee can pursue collection of the amount owed to you. He can even sue your friends or family to collect the money. He is not necessarily bound by any payment terms that you negotiated with your friend or family member. So, even if you never had any intention of collecting the debt, the trustee can still go after it. We know that the last thing that you want is to have a friend or family member caught up in your bankruptcy proceeding. If you tell your bankruptcy attorney about the these types of situations, there is almost certainly a way to handle it to prevent the involvement of the people who owe money to you.
This is another area where there is probably a significant amount of non-disclosure. People tend to be very protective of their firearms, and they are always afraid that they will have to give them up as part of the bankruptcy filing. This is almost never the case. Remember, most firearms are simply not worth a lot of money. Also, the trustees are not in the business of selling individual items of personal property. If you have no other assets of significant value, the trustee is not going to care about your shotgun or rifle. It is only when an individual has a significant collection of firearms that the value becomes an issue. Even then, the Federal wild card exemption may allow you to protect the fire arms. If you fail to disclose even a single shotgun or rifle, the Bankruptcy Court may deny your entire bankruptcy discharge. This actually happened a few years ago in a case in Rochester.
Tools and Household Maintenance Items
Many clients have significant collections of tools and equipment that they have collected over the years. Commonly, these are necessary for the client to carry out his trade or profession. For example, you may be an auto mechanic that has purchased tools from Matco or Snap-on. You may be a carpenter who owns lathes, table saws, and woodworking tools. There is fairly decent protection for “tools of the trade,” so it is important that you provide us with details regarding these items. It is fairly easy for a bankruptcy trustee to figure out if you are likely to own significant tools. By looking at your tax returns, the trustee can determine your occupation (especially if you are self-employed and file Schedule C). It is very unlikely that a self-employed contractor earning $40,000.00 or $50,000.00 a year does not have tools and equipment worth several thousand dollars. Remember, it is the goal of the bankruptcy attorney to make sure that all of your assets are protected. It is always better to disclose all of your assets so that an effective strategy can be developed to protect the items that are most important to you. I cannot think of any client that has ever been forced to turn over business assets that were properly disclosed in a bankruptcy petition.
Even regular household tools have to be disclosed. Almost everybody has at least basic hand tools and a tool box. I am probably one of the least handy people around, and even I probably have about $200.00 worth of tools lying around the house.
You will also have to disclose ownership of lawn mowers, snow blowers, compressors, and other equipment used to maintain your household. With the exception of riding lawn mowers, these assets tend to have very little value and are not of much interest to a bankruptcy trustee.
Artwork and Other Collectibles
Almost everybody has some type of artwork, memorabilia, or collectibles. Most often, these collections are of sentimental value and have no real market value. I once had an employee that collected shot glasses from all over the world. She probably had a couple of hundred. They were of significant value to her personally but would probably not fetch more than $50.00 at a garage sale. If you have any collections of these types of items, please let us know. Even if they are valuable, we can figure out a way to protect them for you. Occasionally, people do have collections of significant value. For example, we had a client who owned more than 10,000 records. We also had a client that owned several thousand dollars worth of baseball cards. If you have a collection like this that you would like to protect, we can almost certainly help you find a way to do it.
Even people without large collections probably have some basic artwork in their home. As you prepare for your consultation, please give some thought to items that would fall into this category.
YOUR SMALL BUSINESS
I have often received calls from prospective clients telling us that they want to file bankruptcy “on their business” but not personally. We certainly understand why people would want to distinguish between their business from their personal interests. However, the reality is that, in most cases, a failed business is going to have ramifications on the business owner’s personal finances. For example, there are probably personal guarantees on some of the business debts, and if the business closes, it is very likely that the creditor will pursue the individual on the guarantee. Also, if there are bank loans involved, it is possible that the bank has taken some type of collateral mortgage against your home, which could be subject to enforcement once the business closes.
When you consult with your bankruptcy attorney, great care will be taken to review your business situation, including the assets and liabilities. While this guide cannot go over every possible business scenario, the following is a summary of the most common situations we encounter:
1. Sole Proprietorships. The majority of our clients with businesses operate them as sole proprietorships. A sole proprietorship typically involves an assumed name, such as “ABC Home Improvements,” which you have probably registered with the local county clerk’s office. You are probably also filing a Schedule C with your annual tax return, and you are most likely maintaining a separate bank account for the business and maintaining separate business records. However, despite all these distinctions between your business and personal affairs, any of your creditors have the same rights to enforce their claims against your personal assets as they do against your business assets. This does not mean that you made a mistake in setting up your business in this way. In most cases, even if you had chosen to set up a formal corporation, it is unlikely that you would have received any business credit without signing personal guarantees.
When you file a bankruptcy case, all of the assets of your sole proprietorship will have to be disclosed to the bankruptcy trustee assigned to your case. In the vast majority of small business cases, the assets will not have significant value. For example, in the home improvement business example, it is likely that you have some tools and equipment. You may even have paid several thousand dollars for these assets. However, when the trustee considers whether they are worth liquidating, he will have to assign a liquidation value. It is exceedingly rare to see a trustee seriously pursue liquidation of business assets in a small scale business.
In addition, with the new Federal “wild card” exemption, there is now considerably more protection available for your business assets. However, there are situations in which the business may simply have too much value to be protected in a Chapter 7 case. This is commonly seen in businesses that have retail locations. The name and “good will” of the business may be worth tens of thousands of dollars. This does not mean that you will lose the business when you file bankruptcy, but it does mean that you will probably have to file a Chapter 13 case and pay your creditors back at least some percentage in order to protect the assets.
2. “S” Corporations and Limited Liability Companies. Whether your business is set up as a corporation or a limited liability company, it will be treated essentially the same way in either a Chapter 7 or a Chapter 13 filing. A value will have to be placed upon your shares in the corporation or your membership interest in the limited liability company. This is best understood with an example.
Let’s say that you own a small home improvement business, but rather than setting it up as a sole proprietorship, you decided to set it up as an “S” corporation. You own 100% of the shares in the corporation. The business has assets worth about $20,000.00 and liabilities of $100,000.00. When your bankruptcy is filed, we would list the ownership of the shares in the corporation. These shares are considered personal property, and the value that is placed on them will be directly impacted by the assets and liabilities. If the assets are worth less than the liabilities, the business probably has no saleable value. The net result, therefore, would be pretty much the same as a sole proprietorship in which the liabilities exceed the assets.
The major difference between the treatment of sole proprietorships and stock interests is that, at times, outside investors may be interested in purchasing the shares or the membership interest of your business. There are a number of local investors (we like to call them “bottom feeders”) who will invest money to take over your business. In some cases, they will close the business and sell the assets. In other cases, they will try to resell the business interest back to you at a premium. If you have properly valued the assets and liabilities of the business, it is not likely that one of these investors will have much interest in your business. However, if they think that you have undervalued the assets or overstated the liabilities, there is a risk that they will try to bid on the assets. You should not be too alarmed at this possibility. This only happens in the context of a Chapter 7 case, and when it does happen, you will have the absolute right to convert the case from Chapter 7 to Chapter 13 to protect your business assets.
Remember, when you consult with our bankruptcy attorneys, we will definitely review the value of your business. There is always an option that will guarantee your protection of the business. So do not let your fear of losing your business be a reason to keep you from talking to a bankruptcy attorney.
PERSONAL INJURY, WORKERS’ COMPENSATION,
AND SOCIAL SECURITY CLAIMS
Many bankruptcy filings are directly or indirectly caused by a significant injury or disability. If you were hurt while on the job, you may have a pending workers’ compensation claim. Even if you are collecting benefits, it is unlikely that these benefits are even close to the earnings that you had prior to the injury.
You may also have experienced an accident that is not work related. For example, you may be collecting no-fault benefits as a result of an automobile accident, and you may have a pending personal injury claim. If the injury is substantial, it may be preventing you from returning to work in your regular occupation.
If you are unable to work due to an illness or disability, you may be applying for social security benefits. As with workers’ compensation benefits, these benefits will probably not be enough for you to pay your day-to-day living expenses.
Fortunately, most claims of the type described above are fully exempt from creditors. Without question, ongoing worker’s compensation and social security benefits are exempt. Although there is still some uncertainty, it is most likely that even back-pay awards for social security or workers’ compensation benefits are exempt as well.
Personal injury claims are treated differently. Under New York Law, there is an exemption of $15,000.00, net of any legal fees that you pay to pursue the claim. The Federal exemption is slightly better. You may also be able to exempt additional amounts that can be attributed to future lost earnings. In many personal injury claims, a significant portion of the award is based upon the expectation that you will not be able to work in the future or might have reduced earnings. To the extent that we can prove this, a larger percentage of the award may be protected.
Even if a portion of your personal injury claim is not exempt from creditors, it may still be wise to file for bankruptcy protection. Personal injury claims can take many years to resolve, and it is unlikely that your creditors are going to wait for payment. A bankruptcy filing can give you immediate protection while you pursue the personal injury claim. This will prevent you from settling the claim too quickly due to financial pressures. If the claim is successful, it may well be that your creditors will be paid in part or in full. However, since there is no guarantee of any recovery in appropriate cases, bankruptcy protection may be necessary as a protective measure.
All claims that you have against any person, employer, or entity due to an accident, injury or disability must be listed in your bankruptcy petition. All available exemptions to protect the recovery or ongoing benefits will be claimed on your behalf, and the ramifications of the bankruptcy filing will be fully explained to you.
Secured debts are monetary obligations that are backed by a lien. The most common secured debts are mortgages and automobile loans. However, there are other types of debts that may fall into this category as well. The following are a few examples:
1. Liens on furniture and other household items. Let’s say you purchased your refrigerator or stove from Sears using a Sears credit card. It is very likely that you signed a sales slip granting Sears a lien on these items. Similarly, if you purchased a dirt bike on a Yamaha credit card, the lender probably has a lien. These liens do not have to be recorded anywhere in order to be effective. They are essentially considered “automatic liens” as soon as you signed the sales slip. In a Chapter 7 case, it is very unlikely that a creditor is going to be interested in taking back your furniture or appliances. However, when we prepare your bankruptcy petition, we still need to disclose that there is a lien on these assets. Depending on the amount that you owe and the significance of the asset, we may have you “reaffirm” the obligation to the creditor. (The concept of reaffirmation will be explained later.) Alternatively, we may simply advise you not to reaffirm the obligation if we feel that it is unlikely that the creditor will ever take any action to repossess it.
2. Real estate taxes, water charges and user fees. Real estate taxes automatically become a lien on your real estate as soon as they are assessed. In fact, real estate taxes are given such importance under the law that they actually take priority over your mortgage, even if the mortgage was recorded many years earlier. It is because of this lien that most banks require an escrow component to your mortgage. They want to make sure that the taxes are paid on time every year to prevent the accrual of a lien that could weaken the position of the mortgage obligation. If you are behind on any of your real estate taxes, it is important that you let us know.
Similarly, water bills and municipal trash collection fees (such as the City of Buffalo User Fee) automatically become liens on your property as they are incurred. If you happen to live in the City of Buffalo and are behind on these charges, it is extremely important that you let us know. The City of Buffalo has become incredibly aggressive in pursuing foreclosure action on unpaid taxes, water bills and user fees. In fact, last year they commenced more than 4,000 foreclosure actions, and some of these were for less than $1,000.00.
3. Money judgments. If a creditor takes the drastic measure of suing you for an unpaid debt, the creditor may eventually obtain a money judgment against you. This judgment gives the creditor certain rights, one of the most important of which is a lien against any property that you own in the county where the judgment is transcribed (recorded at the County Clerk’s office). Although obviously this is not a voluntary lien like a mortgage or car loan, it basically has the same effect on your property. If you attempt to sell or refinance your real estate, the judgment lien has to be paid off. If you are subject to any collection lawsuits, or know that you have money judgments against you, you should let us know. In most cases, we can remove judgment liens against your home. With the new bankruptcy exemptions, we might be able to remove them against non-homestead property as well.
If you are not sure whether there are any recorded judgments against you, you can contact your local county clerk’s office and ask them to do a search for any unsatisfied judgments against you. If the judgment lien is not eliminated during your bankruptcy case, you may be stuck with it for up to 20 years. Although it is possible sometimes to reopen your bankruptcy case to remove a judgment lien about which you were not aware, this is not always easy. For example, in Rochester, the Court will typically not allow a judgment lien to be avoided unless an appraisal or market analysis dated within one year of your bankruptcy filing is submitted. So, if we have to open your case five years after your bankruptcy, there may not be a properly dated appraisal available, and you may be permanently stuck with a lien that could have been completely eliminated if handled within weeks or months of your original bankruptcy filing.
It is the responsibility of the bankruptcy attorney to eliminate judgment liens against your home, but the attorney can only remove these liens if he or she knows about them. Remember, a quick phone call or trip to your local county clerk’s office will give you absolute certainty on this issue.
4. Federal and state tax liens. If you have unpaid federal or state income taxes, sales tax, or withholding tax, it is likely that the taxing authorities will eventually file a tax lien or “warrant” against you. In most cases, these liens are effective against all of your property, not just your real estate. There are no exemptions under state or federal law that protect you against tax liens. Therefore, if you have such liens, we must develop an effective strategy for you to deal with them. We are generally not too concerned about liens on personal property because we have yet to see the IRS or New York State enforce these liens against common household items. If the lien is against a vehicle of significant value or, of course, against your home or other real estate, then we will have to work with you to develop a strategy to pay the debt.
If the amount that you owe to the IRS or the State exceeds the value of your property, then we can probably eliminate the lien to the extent that it exceeds the value. The rest of the lien can be dealt with in the context of a Chapter 13 plan, or we can advise you how to set up payment arrangements with the IRS or the State to pay off any secured balance that survives the bankruptcy.
As the term implies, there are certain debts that are given priority over others in a bankruptcy case. It should come as no surprise that a claim by the IRS for a tax debt is treated better than a credit card claim. It is important that we discuss the priority debts that you owe because, in most cases, these types of debts cannot be discharged. Therefore, if they are causing an immediate problem (for example, you are being garnished by the IRS), you may be better off filing a Chapter 13 bankruptcy to give you up to five years to deal with the priority claim.
The most common priority debts encountered in a typical consumer bankruptcy case are as follows:
1. Income Tax Debts. Although many people think that tax debts can never be discharged in bankruptcy, it is actually possible to eliminate certain types of taxes in a bankruptcy case. The “discharge/ability” of taxes in general will be covered later. However, as a general rule, personal income taxes are both non-dischargeable and priority for the three years prior to the filing date. The three year period is measured from the due date for the tax bill rather than the date on which you filed the return. So, for example, if you owe taxes for calendar year 2007 and filed the tax return on time, the due date for the tax bill would have been April 15, 2008. On April 15, 2011, the tax debt would become dischargeable in either a Chapter 7 or Chapter 13 bankruptcy case. Until the three years pass, the tax debt cannot be discharged and it is considered a priority debt. The same general rule applies to state personal income taxes.
2. Sales Tax Debts. The second most commonly encountered tax debt is sales tax. Unfortunately, state sales tax can never be discharged in any type of bankruptcy case, and it remains a priority debt indefinitely. The Statute of Limitations under NYS law for tax debts is generally 20 years, but there are exceptions to this rule. If you have outstanding sales tax debt, we will often recommend that you file a Chapter 13 bankruptcy because at least the Chapter 13 process will allow you to stop the interest from accruing on the obligation. In addition, in many cases, the penalties that have accrued on the sales tax debt up to the date of filing can be discharged as well.
3. Payroll Taxes. If you own a business or owned one in the past, you may have outstanding payroll taxes. A distinction has to be made between taxes that you owe as the employer and those that you withheld from your employee’s paycheck. The employer’s share of the payroll tax can be discharged under the same three year rule mentioned above. However, taxes that you withheld from your employee and were supposed to turn over to the Federal or State Government are considered “trust fund” taxes. Like sales tax, they can never be discharged in a bankruptcy case, and they are entitled to priority status regardless of the age of the tax.
4. Child Support, Alimony and Maintenance. The bankruptcy laws provide very strong protection to individuals who are owed money for child support, alimony, and maintenance. These debts are always considered priority debts, and there is no statute of limitations under Federal or State law for the collection of these debts. If you file a Chapter 7 bankruptcy, these debts cannot be discharged. However, during the three months or so that the case remains open, there is a stay of enforcement for past due child support and maintenance obligations (not ongoing obligations). Although Chapter 13 can be used to spread out any child support, alimony, or maintenance arrears, as a general rule we find that state enforcement agencies provide payment arrangements that are just as good (and sometimes better) than those that can be arranged in a Chapter 13 case.
If you owe child support, alimony, or maintenance, the bankruptcy process will not be very effective to deal with these debts. However, as these obligations will survive the bankruptcy, it is even more important that you deal with your other unsecured debts so that you focus your efforts on repaying the non-dischargeable obligations. There is nothing worse than being slapped with a wage garnishment by a judgment creditor while you are already struggling to pay your child support or maintenance payments together with your other day-to-day living expenses.
GENERAL UNSECURED DEBTS
Just about every other type of debt not already discussed will fall into the category of “general unsecured claim.” This broad term encompasses all kinds of financial obligations that are not given any special status under the Bankruptcy Code. For most people, the vast majority of the debt that they are going to discharge will fall under this category. The most common unsecured debts include the following:
1. Credit card debts
2. Personal loans
3. Medical bills
4. Past due utility bills
5. Unpaid balances on repossessed or surrendered vehicles
6. Student loans
7. Parking tickets
8. Unpaid rent on prior apartments
9. Tuition charges
It is important to note that even though a debt may be unsecured that does not necessarily mean it is dischargeable. For example, student loan debts are considered unsecured debts but, as most readers are aware, they are almost never dischargeable in a bankruptcy case. In addition, even though most unsecured debts can be discharged, there are circumstances when a creditor might object, such as when the debt was incurred on the eve of the bankruptcy filing and the creditor can establish that the borrower had no genuine intention to repay it. The exceptions to discharge are covered in Chapter VII of this e-guide.
It is very common to meet clients that have co-signed debts. Sometimes, the client is the person primarily responsible for the debt, and they needed someone else to co-sign on their behalf so that they could obtain the loan. In other cases, the client has co-signed on behalf of a family member or a friend, and they are now seeking bankruptcy protection because the other person has defaulted on the obligation. The most common co-signed debts that we see are automobile loans and credit union loans.
Regardless of the nature of the debt, if there is a co-signer on the loan or account, this information must be disclosed in the bankruptcy petition. If the loan is being paid on time, then the co-signer will in no way be negatively impacted by the bankruptcy. So, for example, if a parent co-signed a loan on your behalf, the parents’ credit will absolutely not be hurt by your bankruptcy filing, so long as you continue to make payments on the loan after the bankruptcy. Remember, bankruptcy filing does not prevent you from paying a debt, it merely prevents the creditor from pursuing collection if you are not able to pay it.
By the same token, your bankruptcy filing will not assist the co-signer in any way. The co-signer’s obligation on the debt is completely independent of yours. So if you file bankruptcy, it is likely that the creditor will pursue collection against the co-signer. It is very common to see both co-signers on the obligation have to file separate bankruptcy petitions if the debt in question is significant. We commonly meet clients that have significant debts on automobile repossessions, sometimes as high as $20,000.00. In these cases, it is unfortunately sometimes necessary for both the primary borrower and the co-signer to seek bankruptcy relief because the debt is simply too high for either one of them to manage on their own.
The important thing to keep in mind about co-signed debts is that your bankruptcy filing will neither help nor hurt the co-borrower. Their credit will be exactly the same regardless of your bankruptcy filing.
LEASES AND OTHER EXECUTORY CONTRACTS
If you are leasing or renting an apartment, the bankruptcy filing does allow you to eliminate your obligation on the lease. In legal parlance, you may “reject” the lease agreement. If you have a vehicle lease that is near its termination date and you know that you are significantly over the allowed mileage or will incur wear-and-tear charges, it may be a good idea for you to give up the lease early so that you can be permanently relieved of any remaining obligation. Similarly, if you are leasing an apartment and are behind on the rent payments, the bankruptcy filing does give you the opportunity to walk away from the lease obligation without further payment.
If you wish to continue your vehicle lease or housing lease, the bankruptcy also gives you the option of “assuming” the obligation. This means that you are agreeing to abide by the terms of the original lease agreement. It also means that if something happens after your bankruptcy that prevents you from fulfilling the lease, you will be held responsible for the debt. So, for example, if you assume your vehicle lease and leave your job a few months later, the creditor does have the right to repossess the vehicle and then seek to collect any remaining balances that are due under the original lease agreement.
It is for this reason that you should carefully consider whether you are truly able to afford ongoing payments on any lease. We certainly would not want to see any client file a bankruptcy and then face new debts shortly thereafter. In most cases, our clients do decide to assume the lease, but there is definitely a significant number who make the decision to give up an expensive vehicle or apartment lease. They would rather come out of the bankruptcy process with as little ongoing debt as possible. Sometimes, giving up an expensive asset that you can do without is a very wise course of action.
Although every part of your bankruptcy petition is important, in many cases the decision about whether to file a Chapter 7, Chapter 13, or any bankruptcy at all will be based primarily upon your income and expenses. When we prepare a bankruptcy petition, we spend a considerable amount of time reviewing all sorts of income in the household. The paralegal will review six months of pay stubs for yourself, your spouse, and any other adults employed in the household. When I review the bankruptcy petition (which I do in every single case filed by my office), I review the pay stubs and other income sources, paying particular attention to cases in which the income is higher than average.
One of the major changes made to the bankruptcy laws in 2005 was the adoption of what is called “means testing.” The means test is a formula set up by Congress to determine whether your income disqualifies you from Chapter 7 relief. Although any person’s budget may come under scrutiny in a bankruptcy case, clients whose income falls above the median income for their family size will definitely have their cases subject to more scrutiny by the Office of the United States Trustee in a Chapter 7 case and by the Chapter 13 Trustee in a Chapter 13 case.
The means test is basically a formula adopted by Congress that provides guidelines for allowable expenses for various categories. For example, if you own a vehicle with a loan payment, you will automatically be allowed an “operating expense” of $265.00 per month. This operating expense is intended to cover the cost of gas, insurance, and maintenance. There are a number of such fixed allowances, and there are also a number of allowances based upon your actual monthly expenses, such as your mortgage and car payment.
As of the writing of this guide, the following represents the median income levels in New York State:
Single person $45,548
Household of two $56,845
Household of three $67,292
Household of four $82,587
(add $7,500 for each additional household member)
Determining whether your income is above or below the median income is not always easy. Obviously, if you are a single filer with no one else in your household, then your income would be measured against the median income for a single person. However, if you have a household that includes adult children, parents, friends, or significant others, questions may arise as to whether these people can be considered dependents or household members. Surprisingly, there are really no exact rules on how the household size should be determined. For example, some judges believe that any child over the age of 18 should not be considered dependents, even if they are still residing in your household and have no independent source of income. Other judges routinely allow the inclusion of such dependents until they graduate college and sometimes even after that.
As you can see from the above chart, the larger the household income, the more income you are allowed to have and still qualify for Chapter 7 relief. However, it may not necessarily be helpful to include household members that have independent sources of income. For example, if your adult son is working full time and earning $25,000.00 per year, you would probably not want to include him in your household size because you would then be forced to include his income as well. This could cause your income to rise considerably above the median income level and could actually hurt you on the means testing formula. While it is always necessary to disclose the income and expenses of your spouse, there is some discretion on how to report the income of other household members in a Chapter 7 case.
In a Chapter 13 case, the situation is different. In most instances, the Chapter 13 trustee will require that you report every source of income in the household, even for those members that do not regularly contribute to your budget. For example, you may have an elderly parent residing in the home with you. The Chapter 13 trustee will ask about that parent’s income and expenses. The idea is to obtain an accurate representation of all available household income. Many clients feel that it is unfair for the trustee to inquire about sources of income other than their own. We certainly understand this reaction, and in many cases, we have challenged the trustee’s position on this issue. However, in the vast majority of cases, it is actually very helpful to a Chapter 13 client’s budget to include other sources of income. This is because the additional sources of income are necessary to prove to the Court that the budget is feasible.
Clients may have many different sources of income. The following represents a list of the most common sources:
1. Wages and salaries. It is rare to meet too many clients these days with fixed salaries. Most clients are paid at an hourly rate, and their weekly hours may vary significantly. As indicated above, we will always look at pay stubs in order to complete the means testing and develop an accurate, historical record of your earnings. However, to the extent that the six-month history does not reflect your future earnings, adjustments can be made. You may be a seasonally employed construction worker. If we were to look at your earnings for the months of May through October, they would obviously be much higher than the earnings during the winter months.
Other issues that have to be addressed in computing income are overtime and bonuses. There is no question that the availability of overtime varies greatly, and a client may receive $20,000,00 of overtime one year and then receive none in the next. As a general starting point, we will take a client’s overtime for the prior 12 months and divide it by 12 for purposes of preparing the current income schedule. However, we will ask the client to confirm whether this 12-month average accurately reflects future earning capacity.
Bonuses are treated in roughly the same manner. We will generally average the bonuses for the prior 12 months and list this as a monthly figure when preparing the budget. However, if the client expects that bonuses will either decrease or increase significantly going forward, we will make an appropriate notation in the budget.
2. Self-employment income. If you operate a business of any kind, you will have to disclose the income and expenses for the business. There are three different ways in which the income information has to be presented:
a) Year-to-date gross income. Although this does not have to be disclosed in the budget, it does have to be listed elsewhere in the bankruptcy petition. Since you will be working on your income anyway, this is a good time to review the year-to-date information. Of course, the earlier in the year that the bankruptcy petition is filed, the easier it is to gather this information.
b) Six month income and expenses. As indicated above, the means testing formula requires a review of your actual income and expenses for the business during the past six months. It probably means reviewing your bank statements and checks to verify all business related deposits and expenditures. It may also mean reviewing credit card statements and other records. In preparing the six month statement of income and expenses, it is important not to include personal expenses because those will be listed elsewhere in your bankruptcy petition. Often, the summary prepared by clients shows income considerably higher than that disclosed on Schedule C of their tax return. This is because you are allowed to deduct certain expenses on your tax return that will not show up on the six-month summary. For example, the IRS allows a fairly generous mileage deduction. It also allows you certain depreciation expenses. In your six-month summary, there may be expenses listed for vehicle fuel, but this is likely to be far lower than the mileage deduction.
In our experience, it is rare to see a business showing so much income that it disqualifies the individual from bankruptcy relief. Also, if your primary source of debt is business debt rather than consumer debt, then the means testing may not even apply to you. In our experience in dealing with business clients, the single most difficult piece of information to obtain is the six-month summary of income and expenses. It is for that reason that we strongly encourage you to prepare this information prior to the first consultation with the attorney. Otherwise, it may be difficult to give you accurate advice regarding your bankruptcy options.
c) Income projections. The six-month summary of your income and expenses often does not reflect your anticipated future income. This is because many businesses (probably a majority) experience seasonal fluctuations. For example, if you are a self-employed concrete contractor, most of your income is going to be earned from May to October. You will probably have little or no income at all from November through April. Depending on when you file your bankruptcy petition, the six-month historical summary is either going to show significantly higher or lower earnings than you actual experience on an annualized basis. Therefore, when we prepare your budget, we will generally attach an itemized statement of your projected income and expenses.
When you prepare this, you should try to estimate your average monthly income and expenses going forward. If you anticipate your income will be about the same in the next 12 months as it was during the past 12 months, you can simply take your actual figures from the prior year and divide them by 12. If you believe that your income or expenses will change during the next 12 months, this is your opportunity to present them in a way that most accurately reflects your projections.
In situations where the projected income varies significantly from the historical income, we will attach an explanation so that the case trustee and creditors can understand the change in circumstances.
3. Pension and retirement income. Many people file bankruptcy shortly after they retire from their jobs. Those fortunate enough to receive pension or retirement income probably still have significantly lower earnings than when they were employed. It is important that we list all sources of pension income, including private employer pensions, public employer pensions, military pensions and any other income that you receive on a monthly (or periodic) basis based upon prior employment.
4. Social security, workers’ compensation and disability benefits. Although these sources of income are fully exempt from creditors and in some cases are not even considered “income” for means testing purposes, it is still necessary to disclose them on your budget page. This includes any social security benefits that you may be receiving on behalf of a minor child or dependent. In many Chapter 13 cases, these sources of income are absolutely necessary in order to show that the plan is feasible. In a Chapter 7 case, it is highly unlikely that a client with disability or retirement income is going to be disqualified from bankruptcy relief.
5. Rental income. If you own any type of rental or commercial property, we will have to disclose the ongoing rent that you are receiving plus a statement regarding any fluctuations that you anticipate in the next 12 months. If you have a vacancy in one of your units, we will make a note of this. If you have a tenant that is about to move out, this will be listed as well. As with business income, we must disclose not only the ongoing rents but also the actual rents that you collected for the past six months and the year-to-date rents collected. If there are any expenses associated with the property, such as utilities, water bills, insurance, non-escrow taxes or mortgage payments, these will be listed as well. Obviously, we do not want to portray your rental income as being more than it actually is. For most clients, by the time they finish paying the expenses associated with the property, there is very little left over. In fact, we find that many clients use significant amounts of money trying to maintain rental properties. If this is your situation, we may recommend that you “surrender” the property if there is a mortgage against it. Your bankruptcy petition will discharge all liabilities that you have on the property, with the exception of fines or other criminal penalties imposed in housing court.
Most people are very much aware of their monthly expenses. Actually, it is precisely because of their difficulty in meeting some of their monthly expenses that they are forced to consult with a bankruptcy attorney. The following represents a listing of all expenses that should be disclosed in the bankruptcy petition.
Mortgages and home equity loans
Real estate taxes
Home electric service
Home heating and gas
Cell phone service
Water and sewer charges
Home maintenance and upkeep
Laundry and dry cleaning
Medical and dental out-of-pocket expenses
Vehicle fuel and maintenance
After school activities
Homeowner’s or renter’s insurance
Installment payments to the IRS or New York State
Auto loan payments
Auto lease payments
Other secured loan payments
Mortgages other than your home
Maintenance costs for property other than your home
Alimony, child support, and maintenance
Health club memberships
All other expenses you actually pay
This section of the bankruptcy petition is not concerned with debt that is going to be discharged in your bankruptcy, such as credit cards or past due medical bills. It is concerned with your future expenses, such as mortgage, car payments and utility bills. The list above is not exhaustive. If you have expenses that you actually pay each month that are not included on this list, you should certainly let us know. For example, you may be paying continuing education expenses for your profession. Maybe one of your children is enrolled in gymnastics or music lessons. While some discretionary expenses will be scrutinized, it is still important that they be disclosed. Every trustee and judge has a different perspective on what constitutes an “allowable” expense. In general we find that the local bankruptcy judges are fairly sympathetic to any reasonable expense for the household. In our experience, budgets are more carefully scrutinized in the Rochester district. However, this tends to be more of an issue in Chapter 13 cases than in Chapter 7 cases, unless your income is above the median income or the Court finds that your bankruptcy filing overall lacks good faith.
If you anticipate changes in your expenses going forward, this is something that should be disclosed as well. For example, you may have a car loan that will be paid off in six months, or you may be a new mother returning to work and anticipate incurring significant child care expenses. Any meaningful change in expenses (either up or down) will be listed on the expense page of your bankruptcy petition.
WHAT IS THE STATEMENT OF FINANCIAL AFFAIRS?
The Statement of Financial Affairs is a set of about 25 questions that, as the name implies, is intended to give the Bankruptcy Court and your creditors a snapshot of your finances and a summary of various transactions that may have taken place during the two or three years leading up to your bankruptcy filing.
There are some remedies available to the bankruptcy trustee under federal law that cannot be pursued by a creditor under state law. Some of the questions in the Statement of Financial Affairs are designed to gather information regarding such possible claims.
For most clients, there are only a few questions of the Statement of Financial Affairs that will contain any meaningful responses. We will review the most important questions asked in this chapter.
HISTORY OF PAST INCOME
We are required to disclose all sources of income (taxable or not) on your bankruptcy petition. We must list your year-to-date income, as well as income for the past two calendar years. Since we have already reviewed various sources of income previously in this guide, a detailed analysis is not required here. However, all of the following are sources of income that must be listed:
Interest and dividends
Social security, workers’ compensation, disability
Many of the above sources of income may not be reported on your tax returns. Therefore, while we will definitely need copies of your tax returns for at least the past two years, this may not give us all of the information we need. During the initial consultation, we will review all of the sources of income listed above.
PAYMENTS TO REGULAR CREDITORS WITHIN 90
DAYS OF THE BANKRUPTCY FILING
All payments made to any one creditor totaling $600.00 or more in the 90 days prior to the bankruptcy filing must be disclosed. This includes not only payments on debts that you wish to discharge in the bankruptcy but also payments that you are making on ongoing obligations. The most common types of payments are as follows:
Mortgage and rent payments
Car loans and leases
Remember, we do not have to list every payment made to the creditor. It is only if the payments total more than $600.00 that they have to be listed.
The reason that these payments must be listed is that the trustee in the bankruptcy case may have the right to recover money paid to certain creditors during this 90-day period. The trustee cannot recover money that you have paid on a mortgage, car loan, or lease. However, if you have made payments to your credit card companies during the three months prior to the bankruptcy filing, it is indeed possible that the trustee will be able to recover these payments. This does not mean that you have to pay the creditors again. The idea is to allow the bankruptcy trustee to collect as much money from creditors who were paid right before the bankruptcy filing and then distribute the money equally among all of your creditors.
This may seem like a strange concept, but consider the following example. You have credit card debt totaling $30,000.00, and a few months before filing, you reach a settlement with one creditor. Let’s say that you owe that creditor $4,000.00 and the creditor agrees to accept $2,000.00. Shortly thereafter, you decide that your debt load is simply to high and you opt to file for bankruptcy protection. Is it fair that the one creditor received 50 cents on the dollar while the rest of your creditors receive nothing? The bankruptcy laws attempt to “level the playing field” between your unsecured creditors by allowing the bankruptcy trustee to recover these preferential payments.
Many clients are caught off guard by this unusual bankruptcy procedure. Remember, any recovery that the trustee obtains does not directly impact you. `If there are any unusual payments that you have made to creditors that could impact your bankruptcy case, this will certainly be discussed with you at the time of your first consultation.
PAYMENTS MADE TO RELATIVES WITHIN 12
MONTHS OF THE BANKRUPTCY FILING
Without question, this is one of the areas that catches many attorneys off guard. Clients are often reluctant to disclose payments that they have made to family members during the year or two before the bankruptcy filing. Sometimes people have “heard through the grapevine” that this can get them in trouble or somehow hurt their bankruptcy case. While payments made to family members during the 12 months prior to the bankruptcy filing are indeed an issue, in most cases, proper bankruptcy planning can be implemented to minimize or completely eliminate the impact of such payments.
If you have made a payment to a family member on a loan within the 12 months prior to the bankruptcy filing, the same “preference” rules listed above apply. This means that the trustee can recover money from this family member and spread it equally among all creditors. The rules are not very different, with the exception that the look-back period is 12 months rather than 90 days.
It is important to distinguish between payments made to family members for valid debt obligations as opposed to those that essentially represent gifts. If you legitimately owe the family member money, paying them back is no different from paying back any other creditor, with the exception of the look-back time period. However, if you simply transfer the money to a family member as a gift to assist them in a time of need or to support them in some capacity, this is more likely to be considered a “fraudulent conveyance” (covered later in this guide). The look-back period for this type of transfer is actually six years rather than one year. The last thing that you want to do is to file a bankruptcy petition without disclosing any types of payments that you have made to family members. If the trustee finds out about them, he may commence a lawsuit against the family member to recover the money that you paid. The trustee may also object to your bankruptcy discharge based on non-disclosure.
There is almost always an effective strategy that can be implemented to protect a family member. So be sure that we have all of the necessary information to give you proper advice.
One of the powers given to the bankruptcy trustees is the right to “undo” or reverse various transfers made by a debtor prior to the filing of the bankruptcy case. Essentially, any time a debtor transfers an asset and does not receive fair value in exchange for the transfer, the Trustee may be able to attack the transfer. In some cases, the transfers are involuntary, such as a bank account levy or perhaps even a tax foreclosure. However, in most cases, the debtor voluntarily transfers property out of their name in an effort to shield the asset from the Trustee.
Here are a few examples of transfers that are subject to being reversed:
1. Transfer of real estate, vehicle, or personal property to a family member or friend without payment.
2. The “sale” of an asset to a family member or friend for less than its actual value. For example, if you sell a car to a friend that has a fair market value of $4,000.00 and only receive $1,000.00, the Trustee can reverse the transfer completely or seek a judgment against the person who received the asset. The fact that you gave the family member or friend a “special deal” is not a defense to the Trustee’s action.
3. Granting a mortgage or security interest on property in excess of monies actually borrowed. Sometimes, clients will give a family member or friend a mortgage against their home even though they have not actually received monies in an amount equal to the mortgage. If there is a valid debt that has to be repaid, certainly a mortgage can be created. However, it can only be enforced up to the amount of the actual debt.
4. Placing money or even your paycheck into someone else’s bank account. Often, clients have judgments against them and they are justifiably concerned about money being seized from their own bank account. As a result, they will sometimes use the bank account of a family member or friend as their own. However, as soon as you put the money into someone else’s account, you are technically transferring it to them in such a way that it can be subject to attack.
There are many other examples of fraudulent conveyances that we have encountered over the years. If you have made any type of transfer that you think is even slightly unusual, you should bring it to our attention. In most cases, we can recommend a strategy to minimize the impact of the transfer. In some cases, we have actually told the clients to reacquire title to the asset so that the fraudulent transfer is essentially negated.
If you are considering transferring an asset out of your name to protect you from your bankruptcy creditors, don’t do it. You are almost certainly making the situation worse. In many cases the asset that has been transferred has an available exemption, such as a vehicle or even some real estate. However, once the asset is transferred out of your name, you not only subject the person to whom you transferred the asset to an unnecessary lawsuit but you also permanently lose your exemption. If you have assets that are not exempt, we will work with you to develop an honest strategy to protect the asset.
RECENT SALES OR TRANSFERS
Although we spent considerable time reviewing fraudulent conveyances in the prior section, there is actually no question on the bankruptcy petition that asks you to disclose whether you made a fraudulent conveyance. Rather, there is a general question regarding any transfers that you have made “out of the ordinary course of business” during the past two years. If a transfer or sale of an asset is considered a fraudulent conveyance by the Chapter 7 or Chapter 13 Trustee, this is the question on the bankruptcy petition that will usually disclose the transfer to the trustee. Please keep in mind that, even thought the bankruptcy petition only asks for transfers within the past two years, under state law a transfer that is a fraudulent conveyance can actually be pursued for up to six years. Do not be afraid of “boring us with details” regarding strange transactions that may have occurred during the past several years of your life, including transfers in connection with a divorce, estate planning with your parents, sale or transfer of assets to your family members or friends, charitable contributions, gifts, and/or payments to credit counseling services.
For most consumers, the sale or transfer of any asset is going to be “outside of the ordinary course of business” because the debtor is not actually engaged in any business at all. Therefore, if you sold a car or any other asset for a few hundred dollars, this would have to be disclosed. If you paid back a creditor a few thousand dollars more than 90 days ago (such that it is not picked up as a preferential payment), that payment would still have to be listed as a transfer. It does not mean that the trustee can recover the money from the person that you paid. It is simply a matter of complete and accurate disclosure.
When we review transfers or sales of assets that you have made, we will certainly let you know whether any of them pose potential problems. In most cases, these transactions are perfectly fine. If we feel that any of the transfers are questionable, we will provide you with our professional guidance on how to handle it.
BUSINESSES OWNED WITHIN
THE PAST EIGHT YEARS
This heading is fairly self-explanatory. You will have to disclose any interest in a business that you have owned during the past eight years, including those that are no longer operating. This applies not only to sole proprietorships but also to businesses in which you have a fractional interest. For example, if you own a small percentage in a family business, even one for whom you do not actually work, this must be listed.
The specific information that must be provided is the name and address of the business, the employer identification number, the nature of the business, and the years of operation. For more complex businesses, it may also be necessary to provide information regarding audits and inventory, but this is almost never necessary in a typical consumer bankruptcy case.
INTENTIONS REGARDING SECURED DEBTS
One of the most common questions that we are asked by prospective clients is whether their mortgage company is going to foreclose against them if they file bankruptcy. Similarly, clients often ask whether their vehicle will be repossessed solely because of a bankruptcy filing. As long as you are current on the mortgage payments, car payments, or other secured debts, you will absolutely be able to keep the property. We can assure you that lender is not interested in taking back your property due to a bankruptcy filing. In fact, quite to the contrary, they are hoping that you “reaffirm” the debt. Reaffirmation is a very simple process in which the bankruptcy debtor agrees to renew the contract. The debtor will be asked to sign a formal agreement acknowledging the debtor’s desire to keep the collateral and their promise to abide by the original terms of the agreement.
Reaffirming a debt is a serious obligation. It essentially means that the obligation is going to survive the bankruptcy filing. So, you will have to carefully consider whether you can afford to continue to make the payments on the obligation.
This Statement of Intention simply indicates whether you intend to reaffirm the debt or whether you instead wish to surrender the collateral back to the creditor. If the asset is surrendered, you will be relieved of any personal liability on the debt. So, for example, if your car is sold at auction for less than you owe on it, the lender can never pursue you for the deficiency.
If you have judgment liens against your home, the Statement of Intention will indicate whether you intend to remove these judgment liens. In almost every case, judgment liens can be removed against your home as long as your equity in the property is less than $75,000.00 ($150,000.00 for a married couple) and you claim the homestead exemption. In rare instances, it may be in your interest to leave a judgment lien in place. For example, if the judgment lien was absorbing all of the equity in your home, and there is an IRS lien sitting right behind it, you may actually want to preserve the judgment lien to give you some protection against IRS enforcement action.
The following is a list of other topics covered by the Statement of Financial Affairs. As these do not arise often in a consumer bankruptcy case or are very self-explanatory, we will not review them in the guide. Of course, we will review the questions during the consultation process, but it is doubtful that they will raise any real questions.
Lawsuits or other proceedings you have been involved in
Garnishments and asset seizures
Repossessions and foreclosures
Losses from fire, theft, gambling, or other casualty
Payments for debt counseling
Closed bank accounts
Safe deposit boxes
Setoffs by banks and credit unions against your accounts
Property held for another person
THE INITIAL CONSULTATION
If you have made it this far in the guide, then you will already know the topics that are going to be discussed during your first consultation with the attorney. The reason that I have spent so much time reviewing these topics is so that, when you actually come in to the office for the appointment, you will already know why we are asking questions regarding your property, debts, income and historical financial transactions. We can go directly to the specific details of your situation and focus our efforts on answering questions that apply uniquely to your case rather than to all bankruptcy cases in general.
In preparing for the consultation, you will receive the following list of documents that you should bring to the consultation. Do not be too alarmed by the length of the list. In most cases, fewer than half of the items are required. Even if you come to the consultation without all of the necessary paperwork, we should still be able to give you a fairly accurate assessment of your bankruptcy options.
As many pay stubs as you have for the past six months for you and (if you are married) your spouse, even if your spouse is not filing with you. If you do not have pay stubs, see if your employer can provide you with a week by week summary of earnings for the past 6 months
Most recent two years tax returns, including all schedules and attachments. If you do not have copies of the returns, we can order transcripts for you from the IRS for a fee of $25 per year.
Titles to all cars, boats, motorcycles, campers. Registrations for snowmobiles, ATVs, jetskis, campers, trailers, and other recreational equipment.
Most recent tax bill for your home, as well as any recent appraisals. If you own more than one property, we will need tax bills and appraisals for those properties as well
Copy (not the original) of the deed to your home and other real estate which you own
Bank statements for all your bank accounts for the past 90 days and a printout or handwritten statement showing your current bank account balances
Statement showing the cash value, death benefit and beneficiary of life insurance policies
Statement showing the current value of pension plans, IRA accounts, annuities, and other retirement plans
For self-employed individuals, a handwritten, detailed list of the total income and expenses for your business during the past six months
Copies of foreclosure papers, wage garnishment papers, bank account restraint notices, and any other court documents
Copies of all bills and collection notices for any debts that you owe, including debts you want to keep paying after the bankruptcy. We do not need copies of day to day bills (such as utility bills or car insurance bills) unless you are behind on them, in which case we do want copies
A list of all family members to whom you owe money (or that owe money to you), and a list of all money or property that you have transferred family members during the past 12 months. The list should contain names and addresses. [You will still be able to pay the family members back at some point, but they must be listed as creditors.]
At our office, we can reassure you that all consultations are conducted by an attorney. You will never be asked to consult with a paralegal initially or to fill out lengthy forms. [The only form that you have to fill out is a list of your personal property.] Although paralegals are employed by most attorneys to prepare the actual bankruptcy papers, the decision about filing bankruptcy will be made with the attorney, not support staff.
During the first part of the consultation, the attorney will review all of the information that must be provided in the bankruptcy petition. Generally, if you have brought in all of your relevant documentation, the “intake” process can be completed in about 20 to 30 minutes. I know that it seems like it could take hours to go over the information covered in this book so far, but in fact it is much simpler than you think. Remember, most of the prior discussion in this guide explains why the information is needed rather than what is actually needed. If you understand the “why,” then the rest of it is fairly straightforward.
Once the intake is completed, the attorney will determine whether you should be considering bankruptcy at all, and if so, will make a recommendation regarding Chapter 7 or Chapter 13 bankruptcy. The attorney will explain the differences to you to the extent that you are not familiar already with both processes. The attorney will then explain the procedures involved with each type of bankruptcy case and the costs associated with the bankruptcy. You will be given ample opportunity to ask any questions that you have regarding your situation. There is no question that is “off limits,” and we have been asked some pretty strange things in the course of representing more than 10,000 clients. Do not be embarrassed to bring any information to our attention that you think we should know. Many clients end up filing bankruptcy due to significant life-altering events such as divorce, abusive relationships, depression, job loss, gambling, alcohol abuse, and/or drug addiction. This is only a partial list. Knowing the fundamental reason for the bankruptcy often allows us to give you better guidance about the process.
At the end of the consultation, you will be asked whether you have made a decision about the bankruptcy filing. We certainly do not expect you to make an “on the spot” decision, and you will never be pressured in any way about a bankruptcy filing. We find that approximately 70 per cent of our clients have definitely made up their mind to file bankruptcy either before the consultation or by the time it is over. About 30 per cent need some additional time to consider their options. This is certainly no problem. You do not have to sign any paperwork or make any commitments on the spot. By law, we are required to send you a retainer agreement and certain mandatory disclosure. You will receive these in the mail within three days, and we hope that you will review the terms carefully. There really should be no surprises in either the retainer agreement or the disclosures about filing bankruptcy.
HIRING THE BANKRUPTCY ATTORNEY
If you decide to file a bankruptcy case, we certainly want to be the attorneys that you hire for that purpose. When you hire an attorney, in legal parlance, you are “retaining” that attorney to represent you. The retainer agreement that you receive will clearly (and hopefully in pretty simple terms) outline your rights and responsibilities. However, there are a few issues that we want every potential client to understand when they hire us:
1. Retaining the firm in general. If you wish to retain us, you can generally do so for a small deposit of $250.00. We want you to understand that, paying this deposit does not mean that your case is going to get filed. That can only happen after the total fees quoted to you at the initial consultation are paid. However, we understand that most clients are not in the position to pay all of the fees up front. So we try to be as flexible as possible with payments. When you send in the retainer agreement and the deposit (usually about $250.00), you receive the important benefit of being able to contact us as necessary until your case is filed with any questions or concerns that arise. In addition, you can refer any of your creditors to our office, and these creditors can confirm that you are indeed represented by us. Creditors will not wait forever for the bankruptcy filing, but in most cases, your creditors will leave you alone for 30 to 60 days to follow up on the status of the bankruptcy filing.
2. Payment plans. We are always willing to set up payment plans for our clients. In Chapter 13 case, these payment plans tend to be very simple because the bankruptcy laws allow us to “finance” most of our fees over the duration of your Chapter 13 plan. Therefore, in the majority of cases, we ask clients for a few hundred dollars up front towards our legal fees, plus the applicable Court filing fee (which is currently $274.00). As indicated above, we normally ask Chapter 13 clients for an initial deposit of $250.00. As soon as that is received, we will prepare the bankruptcy petition and either mail it to you or arrange for you to come into the office to sign it in person. Before the case is filed, you will have to pay the second part of the up front fee (generally about $325.00). At that point, assuming your case is fully prepared, it will be filed with the Bankruptcy Court, and you will have immediate protection from your creditors.
Chapter 7 cases are different. Unfortunately, the bankruptcy laws do not allow payment plans that extend after the date of the actual bankruptcy filing. What this means is that, to the extent that the legal fees are not paid up front prior to the filing, they are technically a dischargeable debt, no different from any of the other debts that are listed in your bankruptcy petition. In fact, if the Chapter 7 bankruptcy lawyer does not collect the fees prior to the filing, the attorney could get in trouble for even asking you to pay the balance of the bill. We know that there are some local lawyers who will file the case with only a small deposit and then accept payments after the filing. We even have heard of one local attorney who takes post-dated checks from the client and then cashes them after the bankruptcy. We feel that these types of payment arrangements violate the bankruptcy laws, as well as the ethics guidelines governing attorney conduct. Therefore, we hope you understand why all of the fees have to be paid before the case can be filed.
Of course, we are always happy to set up payment plans with our Chapter 7 clients. In fact, it is not unusual for a client to take up to a year in order to come up with the filing fee. For many people, the delay in filing the bankruptcy will not cause them any real problem. For example, for clients who are receiving exempt sources of income such as social security or pension, there really is not much that creditors can do to go after these sources of income. So the clients have the “luxury” of paying for the bankruptcy fees in installments. On the other hand, some clients are facing bank account restraints or wage garnishments that have already taken effect or will take effect shortly. Understandably, these clients would like to have their case filed right away. Certainly, it is not a problem to file a bankruptcy case rapidly, and we routinely file cases in less than a week (sometimes even in 24 hours). However, remember that the case cannot be filed until all of the fees are paid up front.
If you are in a situation where you are facing wage garnishment or other immediate threats, then it may be a good idea for you to ask a family member or friend for a short term loan. Even though this loan is considered a “debt” that you should list in the bankruptcy case, you should always remember that the bankruptcy filing does not prevent you from paying a creditor, it merely prevents the creditor from demanding payment. Obviously, you are going to want to pay back the person that loaned you the money for the bankruptcy filing, and this has happened in many of the cases that we have filed on behalf of our clients.
In a Chapter 7 case, we generally do not prepare the complete bankruptcy petition until all of the fees are paid. This is different from our Chapter 13 practice. The reason is simply that, if it does end taking a few months for the client to pay the fee, we will have to update the financial information before preparing the bankruptcy case. Many things can change even during just a few months. You may be receiving more or less overtime at work; you may have switched bank accounts or have higher or lower bank account balances; you may have paid creditors additional funds that have to be disclosed in the Statement of Financial Affairs. We do generally enter basic information about your case that is unlikely to change, such as your personal information and the basic list of creditors. We generally also conduct various public record searches including judgments, tax liens, Department of Motor Vehicle registrations, real estate transactions.
We know that clients waiting for their bankruptcy petitions to be filed are under significant emotional, financial and psychological stress. We pride ourselves in being able to prepare and file bankruptcy cases quickly, and we regularly receive referrals from other attorneys for their clients that need assistance faster than they can provide. Once all of the fees in the case are paid, we can assure you that your case will be filed within a few weeks or sooner. Until that point, just do the best that you can to accumulate the necessary fees, and please understand the ethical constraints under which we operate. Also remember that, even though your case is not filed, we are still here to help you understand the process.
PREPARING THE BANKRUPTCY PETITION
The bankruptcy petition is intended to give the Court, the bankruptcy trustee, and all of your creditors an accurate snapshot of your financial situation as of the date of your bankruptcy filing. Although different attorneys and courts have different opinions about the level of detail required in the bankruptcy petition, we always prefer to have your petition contain too much detail rather than too little.
As we discussed earlier, there are a number of documents that you will bring with you to the initial consultation. When we complete the list of your property, we will generally rely on your opinion of value, with certain exceptions.
1. Real estate. If you have acquired the property recently, then the purchase price typically is a good indication of value. On the other hand, if you have made significant improvements to the property, then the purchase price may not be of much assistance. In many cases, if the client is not sure of the value of the property, we may rely on the tax assessment, as long as the client feels that the assessment in not way off the mark. In the past few years, the value of property has been a little less important because of the expanded homestead exemption. In some cases, it is possible that we are going to ask you to obtain an appraisal or market analysis for the property. This will often be the case if there are judgment liens against your property that have to be eliminated.
2. Vehicles. If your vehicle has a loan against it and you are filing a Chapter 13 bankruptcy petition, then we are required to use the NADA retail value for the vehicle. It is unlikely that you could realistically sell your vehicle for this amount, but when determining how much your auto lender is entitled to receive in a Chapter 13 plan, the bankruptcy laws do require a valuation at a retail standard.
If there is no lien against the vehicle or if the lien is far less than the probable value of the vehicle, we will utilize either the Kelley Blue Book private party value or the Kelley Blue Book trade-in value. In the rare situations where the bankruptcy trustee does attempt to sell a vehicle, normally the sale takes place in an auction context. The trade-in value most fairly represents the auction value, but the Kelley Blue Book private party represents the value upon which we rely in determining whether the trustee might make a claim against your vehicle. If you genuinely believe that the Blue Book or retail value does not accurately reflect the value of the vehicle, then you are welcome to obtain an appraisal. However, obtaining an appraisal of a vehicle is not all that simple. Many times, local dealerships will give you a one-line statement of value, and this is not likely to be accepted by the Court or the Trustee. If the client actually obtains a formal appraisal from an auctioneer, and if the auctioneer is qualified and respected by the Bankruptcy Court, then certainly that valuation will carry some weight. If we think that an appraisal or a valuation of the vehicle is appropriate, we will direct you to obtain one.
3. Bank account balances. Bank account balances change everyday. Although we will have discussed your bank account balances at the time of your first consultation, the balances that listed in the bankruptcy petition should accurately represent the amount in the accounts on the date that you signed the bankruptcy petition. If you have on-line banking, it should be simple enough to obtain up-to-date balances. You can also call your bank’s automated account information line. You should not rely on your checkbook to give us your balance. This is because some checks may not have cleared, and even though you may have the money in the account earmarked for certain creditors, the Bankruptcy Court will consider the money in the account yours if it was still in the account on the date of the filing. It does not matter if the checks cleared a day or two after the filing. In most cases, minor fluctuation in bank account balances do not matter. However, in certain situations, even the difference of a few hundred dollars in the account could make the difference between the trustee pursuing assets in your case or not.
4. Additional or new bills. In order to prepare your bankruptcy petition, we are going to pull an up-to-date credit report for you. These reports should show all of your credit cards, bank loans and credit union loans. However, credit reports are not very good about showing other types of debt, such as medical bills, utility bills, or debts to the State or Federal Government. Of course, credit reports will also not show any loans that you owe to friends or family members.
If the information that you gave to us at the time of the initial consultation regarding your debts is not complete or if there are any new creditors, then please be sure to provide us with that up-to-date creditor information when you formally retain our office.
5. Changes in employment or income. If it has been a few months since you consulted with our office, it is very possible that your income situation has changed. Many clients come into our office at a time that they are experiencing some type of short term job loss or disability. If there are any changes in your income situation that are meaningful, then please bring those to our attention as soon as they happen.
6. Transfer of money or assets for any reason. If you have sold a vehicle, real estate, or any other “big ticket” item since you consulted with our office, please let us know. This is unlikely to affect your bankruptcy petition, but it is something that has to be disclosed. Also, if you made any large payments to creditors or if you gave money to a family member or friend for any reason (even repaying a loan), this should be brought to our attention. As discussed earlier, in the topics of “Preferential Payments” and “Fraudulent Conveyances,” any payments to friends or family members may pose a problem in your bankruptcy case. So, it is important that we discuss these. Remember, once your case is filed, there is nothing that can be done to address the problem. A little pre-bankruptcy planning can go a long way.
REVIEWING AND SIGNING YOUR BANKRUPTCY PETITION
Although you are always welcome to come in to the office to sign your bankruptcy petition, we always prefer to mail the petition to you so that you can take as much time as you need to review it for accuracy. Although we certainly do not expect you to understand every legal term contained in the bankruptcy papers, most of the factual questions are very easy to understand, especially if you have read this guide.
If any of your assets are omitted, you can write them in or attach a note to the petition. Similarly, if there are any debts to add, you can give us the bills. Although our paralegals take significant care in preparing your bankruptcy petition, you must understand that the accuracy of the bankruptcy petition is really up to you. If the Trustee discovers that the information in the petition is inaccurate or that an asset was not listed at all, he is going to look to you for an explanation, not to your bankruptcy attorney.
You will never be inconveniencing us by asking us to revise your bankruptcy petition. In many cases, our clients do make changes to the bankruptcy petition. When this happens, we will simply revise the paperwork and then mail the final draft to you. Honestly, it is much easier to make changes to the bankruptcy petition before it is filed with the Court than after.
Although you should obviously review the entire petition when you receive it, the following are the areas to which we would like you to pay special attention:
1. Any assets that you have acquired or disposed of
2. Verifying that all of your assets, including household items, are properly listed on Schedule B of the bankruptcy petition
3. Making sure and verifying that all of the creditors are properly listed on Schedules D and F of the bankruptcy petition
4. Double checking our income calculations, including payroll deductions, for accuracy. If you anticipate any changes in your income during the next 12 months, please let us know.
5. Letting us know about any changes in expenses (either up or down) that have taken place since the first consultation. If you are filing a Chapter 13 bankruptcy petition, we must show that your plan is feasible. Therefore, in preparing your bankruptcy petition, sometimes minor adjustments are made to certain expense items. Unless there has been a drastic change in your financial situation, the net income on the bottom of Schedule J must stay essentially the same or the Trustee may object to your plan based on “feasibility” concerns. While the expenses must be properly listed, it may be necessary for you to adjust certain expenses in your life in order for the plan to work.
6. Verifying year-to-date income figures. The easiest way to do this is simply to provide us with your most up-to-date pay stubs from your current position. If you have changed jobs during the calendar year, please be sure that we also have the last pay stubs from any prior positions. For items such as rental income, disability benefits, workers’ compensation benefits, you may have to do some manual calculations to make sure that we have accurate figures. When we prepare the bankruptcy petition we always assume the consistent receipt of such income sources, but obviously if a tenant hasn’t given you rent for a couple of months, then our assumption is going to be wrong. We will only know that if you tell us.
7. Providing us with all documents requested by the paralegal in the cover letter included with the bankruptcy petition. We will always need up-to-date pay stubs, but we may request other documents to confirm the accuracy of the information in the petition. For example, if the Department of Motor Vehicles records show a vehicle registered in your name that you did not tell us about, the paralegal will probably include the record with your bankruptcy petition and ask you for an explanation regarding the asset.
PRE-BANKRUPTCY CREDIT COUNSELING
In order to file any type of bankruptcy case, the client must undergo mandatory, basic credit counseling. There are dozens of agencies that are approved to provide the pre-bankruptcy credit counseling course. Our website contains fairly up-to-date information regarding approved credit counseling providers. You can also obtain this information from the website of the United States Trustee at www.usdoj.gov/ust. Fortunately, the credit counseling can be done by phone or even online. We highly recommend that you do the counseling by phone because then you can verify with a “real person” whether you have taken all of the steps necessary to obtain your credit counseling certificate. It is our understanding that the online course always requires a follow-up phone call anyway, and without this phone call, the credit counseling is not complete.
Unless there is a true emergency, such as a foreclosure sale within a matter of hours, we absolutely cannot file your bankruptcy petition without the credit counseling certificate. We are going to review the credit counseling requirement with you at the time of the first consultation. It is also going to be reviewed in the retainer agreement, and the cover letter accompanying the bankruptcy petition will remind you of the credit counseling requirement.
If you decide to proceed with the bankruptcy case, the credit counseling certificate is good for six months. We encourage you to get it out of the way as soon as you make the decision to file the bankruptcy, unless you feel that it is going to take you several months to pay the necessary filing fees. In that case, you should probably wait until you make the final payment for the case to ensure that the credit counseling certificate does not expire. There is a fee associated with the pre-bankruptcy credit counseling, and the fees do vary significantly. The lowest fee is about $20.00 per person, and the highest is about $60.00 per person. We do not have up-to-date pricing information, but if you visit the website for any of the approved credit counseling agencies, you will be able to obtain pricing information.
COMMENCING THE CASE WITH THE BANKRUPTCY COURT
All bankruptcy petitions are filed electronically with the Bankruptcy Court. This is very advantageous for both the client and the attorney, especially in situations were there is an immediate concern, such as a pending foreclosure, repossession or wage garnishment. As soon as the bankruptcy petition is filed, the client is protected by what is known as the “automatic stay.” This is a powerful legal remedy that essentially freezes every creditor in its tracks. Even if a particular creditor does not know about the bankruptcy petition as soon as it is filed, any actions that are taken after the bankruptcy filing can be reversed. In extreme situations, even foreclosure sales that have taken place after the bankruptcy filing have been nullified. For example, we have had situations in which bankruptcy cases were filed literally minutes before the foreclosure auction. In such cases, it may not be possible to give the Bank’s foreclosure attorney sufficient notice of the bankruptcy filing. They probably have already sent someone to the Court to attend the auction. Even if the auction has taken place, it is void due to the bankruptcy filing.
If we know about a pressing situation, we will immediately notify the creditor on your behalf or provide you with the case number and the filing information so that you can contact the creditor. If there is a pending foreclosure sale, we will always fax a copy of the first page of the bankruptcy petition to the Bank’s attorneys so that they can stop the foreclosure proceeding. If there is a pending repossession, we will provide you with the case information and ask you to call the lender’s toll free number to give them this information. If there is a wage garnishment, we will (within 24 hours of the filing of your petition) send a letter to the County Sheriff’s office or City Court Marshal to terminate the wage garnishment. Although it may take a few pay periods for the garnishment to end, any money that has been taken from your paycheck subsequent to the date of the bankruptcy filing must be returned to you by the creditor.
All creditors are notified of your bankruptcy filing directly by the Court. If there is a particular creditor that is continuing to bother you after the bankruptcy filing, you can provide them with the case number and filing information. By law, they are required to terminate all collection activity immediately. In fact, if you receive a phone call or a letter from a creditor after they received notice of your bankruptcy petition, this is a serious violation of your bankruptcy rights. Creditors can be held responsible for significant damages when they violate the automatic stay protection.
In Chapter 7 cases, the initial court hearing in your case will be scheduled by the Clerk of the Court. In Chapter 13 cases, the Court date is selected by the Chapter 13 Trustee. Generally, the first Court hearing in the case is scheduled anywhere from 30 days to 60 days after the date your bankruptcy is filed. It is mandatory that you attend the hearing, and you will receive a copy of the scheduling notice directly from the Court. As soon as you get it, please be sure that you make any arrangements with your employer that are necessary to ensure that you are able to attend the hearing.
The first hearing in your case is always conducted by the case trustee assigned to your bankruptcy. The hearing is called a “Section 341 Meeting of Creditors.” This is simply a reference to the section of the Bankruptcy Code that requires the meeting to be held. Whether you file a Chapter 7 or a Chapter 13 case, the meeting of creditors is the first opportunity for the trustee or your creditors to question you regarding the bankruptcy petition. The hearings in a Chapter 7 case are very different from those in a Chapter 13 case. The steps after the meeting of creditors also differ significantly in a Chapter 7 and Chapter 13 case. Therefore, this guide is going to separately treat the procedures in Chapter 7 and Chapter 13 cases so that the prospective client can understand what steps may apply to his or her case.
ASSIGNMENT OF THE CHAPTER 7 TRUSTEE
AND THE SCHEDULING OF THE INITIAL HEARING
There are about 10 Chapter 7 Trustees in Buffalo and 8 Chapter 7 Trustees in Rochester. It is impossible to know with certainty which trustee will be assigned to your case because all assignments are random. However, the trustees are all private attorneys appointed by the Office of the United States Trustee. They are not employees of the Bankruptcy Court and they receive payment based only upon the number of bankruptcy cases they handle and the value of assets that they recover for creditors.
In general, the more aggressive the Chapter 7 Trustee is in pursuing assets in the case, the more money that trustee is going to make. The compensation system for Chapter 7 Trustees is incentive-based with a sliding scale fee based upon the money recovered for creditors. While all Chapter 7 Trustees have a duty to collect money for creditors where possible, there is unquestionably a difference in the way different trustees handle bankruptcy cases. Some trustees are more cordial than others at the hearings. Some are more aggressive in pursuing assets. When we file a bankruptcy case, we try to prepare it in such a way that it will pass scrutiny with even the most difficult trustee
Once a trustee is assigned to your case, the meeting of creditors will be scheduled by the Court, and you will receive a notice that provides you with the name, address and phone number of the trustee, as well as the hearing date scheduled for your case. You should never contact the Chapter 7 Trustee directly unless you are instructed to by our office. In most cases, it is unlikely that the trustee would speak directly to you anyway due to the ethical prohibitions that prevent an attorney from speaking directly with a party who is represented by another attorney. Any communications that you wish to make to the trustee should always be made through the attorney’s office.
Prior to the initial meeting of creditors, we must provide the Chapter 7 Trustee with copies of your last filed tax return and a complete copy of your bankruptcy petition. Although this is the minimum requirement, trustees are always looking for additional information, and under the local rules, they are entitled to the following:
1. Complete copy of your last two years Federal and State tax returns
2. Copies of bank accounts statements for 90 days preceding your bankruptcy filing for all bank accounts that you own
3. Copy of the deed to your property
4. Statements showing the payoff balance on any mortgages, home equity loans, or liens against your property
5. Titles to all motor vehicles, boats and other titled vehicles
6. Statements showing the current value all mutual funds, retirement accounts, annuities and other financial accounts
7. Statements showing the value of any life insurance policies
Hopefully, all of the information requested above has already been provided to your attorney prior to the filing of your case. Frankly, it is difficult to prepare the case without most of this information anyway. The only exception is your most recent bank account statement because it is unlikely that you had yet received this from the Bank when your bankruptcy case was filed.
It is always a good idea to bring copies of the documents listed above to the initial hearing. If the trustee is not satisfied with the sufficiency of the documents produced at the initial meeting of creditors, he or she has the right to adjourn it and force you to come back on a different date. Some of the more detail-oriented trustees routinely adjourn cases even for relatively minor documents such as vehicle titles.
It is also extremely important that you bring proof of identification and picture identification to the initial meeting of creditors. The trustee cannot conduct the meeting without it. Acceptable photo identification includes a driver’s license, health insurance card, or government issued identification card. Acceptable proof of your social security number includes your social security card, a W-2 statement, or a pay stub showing your complete social security number. A government issued identification with your social security number should also be sufficient.
WHAT HAPPENS AT THE MEETING OF CREDITORS?
The meeting of creditors is conducted by the Chapter 7 Trustee assigned to your case. The hearings generally take about 10 minutes or less, and in most instances, the Trustee simply reviews the information already contained in your bankruptcy petition. Therefore, if your petition is complete and accurate, the hearing should run very smoothly and there will be no surprises. The typical issues that the trustee asks about are as follows:
1. The value of your real estate and mortgage balance against it
2. The value of your automobiles and the liens against them
3. The balances in your bank account on the date of the bankruptcy filing
4. Any business interests that you may own
5. Any payments that you made to regular creditors within 90 days of the bankruptcy filing or to family members within one year
6. Any personal property that is unusual in nature, such as a stamp collection, large collection of guns, or a boat
Although your creditors do have the right to appear and ask you questions at the meeting of creditors, it is now extremely rare for any creditor to actually appear. We have not seen any representative appear on behalf of a credit card company for many years. Sometimes, local credit unions will send a representative to the hearing to ask questions. This is mainly if there are significant liabilities for charges incurred right before the bankruptcy filing or if the credit union has some reason to believe that there was fraud involved in the transaction.
It is more common for a representative of the United States Trustee’s Office to appear and ask questions. The United States Trustee is a division of the Department of Justice. The U.S. Trustee’s function in a Chapter 7 case is, in part, to review the bankruptcy petition and determine whether the debtor meets eligibility requirements. If your income is above the median income, it is likely that the U.S. Trustee will review it more carefully. This does not mean that the U.S. Trustee will object to your bankruptcy case, but if they feel that you are only “passing” the means test because of the maintenance of an unnecessarily high number of expenses, an objection is possible. For example, if your mortgage payment is $3,000.00 per month and you are driving two leased vehicles that cost $700.00 per month, the U.S. Trustee might feel an obligation to bring this to the Court’s attention. Even if you do pass the means testing, there are instances where the U.S. Trustee may still feel that the circumstances of the case allow for at least a partial repayment of your creditors. In some rare instances, the U.S. Trustee will object to a bankruptcy case simply believing that the debt is overwhelmingly high compared to a person’s income.
You should not worry too much about the potential involvement of the U.S. Trustee. When you consult with the attorney, we will give you our opinion as to the possibility of an inquiry by the U.S. Trustee. Even if they ask questions about a particular case, it is rare that they actually pursue a formal objection. Since the change in the bankruptcy laws, we have filed a few thousand new bankruptcy cases, and the U.S. Trustee has asked for dismissal in exactly 3 of those cases. Even if the U.S. Trustee does object, this does not mean that you will lose the ability to seek bankruptcy protection. It is possible that we will recommend a conversion of your case from Chapter 7 to Chapter 13 because a client has essentially an absolute right to convert their case from Chapter 7 to Chapter 13 at any time.
The meeting of creditors will be closed by the Chapter 7 Trustee after he or she has finished asking all relevant questions and after giving any other creditors or the U.S. Trustee to question you as well. In cases where the Chapter 7 Trustee or the U.S. Trustee need additional information regarding your case, they may adjourn the meeting to another date and time. Generally, if the trustee is looking just for documents rather than additional testimony, you will not be required to return to the meeting. The adjournment date is simply to monitor that the documents are provided. If you need to come back, you will know that at the time of the hearing. You will not get any notices from the Bankruptcy Court. So it is important that you mark down the date and time for any adjournments.
CASES INVOLVING ASSETS THAT ARE FULLY EXEMPT
The vast majority of Chapter 7 cases are considered “no asset cases.” This means that all of the assets that you own are fully exempt from creditors or that the non-exempt assets are simply not worth enough to result in any meaningful distribution to creditors. For example, if you have household furnishings or clothing that slightly exceed the available exemptions in value, it is a near certainty that the trustee will not make a claim to them. These kinds of assets are almost impossible to sell, and if the trustee cannot collect at least $1,000 after all applicable sale costs, then the trustee will probably close the case.
If the trustee determines that your case is a no asset case, he or she will file a report with the Bankruptcy Court within a few days after the meeting of creditors. The filing of this report will mark the end of your direct involvement with the case trustee.
CASES INVOLVING ASSETS THAT ARE NOT FULLY EXEMPT
In a small percentage of Chapter 7 cases, the Chapter 7 Trustee does feel that there are one or more assets that could be sold for the benefit of your creditors. In most of these cases, the client already knows beforehand that such an asset exists because it will have been discussed at the time of the initial consultation or at some point prior to the bankruptcy filing.
The following represents a few examples of potential assets situations:
1. You own a home worth $100,000 and a mortgage against it worth $50,000. In order to protect the equity in the home, you must claim the NYS homestead exemption. You also own two vehicles worth $4,000 each. The standard NYS automobile exemption protects your first vehicle worth $4,000. However, there is no exemption available to protect the second vehicle. This asset is technically available for your creditors, and it is valuable enough that the trustee will either sell it or give you an opportunity to “buy it back” from him.
2. The same facts as above, but instead of owning two vehicles, you own a few acres of land in an outlying county that you may use for camping or hunting. The property is worth a few thousand dollars, but you have not used the property for several years, and you simply do not care that much about it. You file the bankruptcy case knowing that the Chapter 7 trustee is going to sell the property at auction or through a private sale.
3. You do not own any real estate, but you own a business that has $15,000 in total assets. The trustee agrees that the $15,000 valuation is accurate, but even after the application of all available exemptions, there is still about $3,000 in non-exempt business assets. The trustee will seek an offer from you for the $3,000 in non-exempt assets or he will ask you to turn over a portion of the business assets.
Remember, if you have provided complete disclosure regarding your assets and their value in the bankruptcy petition, you will not be surprised by any demand made by the Chapter 7 Trustee in the case. In other words, you will be going into the bankruptcy case knowing that you will have to negotiate some type of deal with the Chapter 7 Trustee, or you will have made the decision to simply give up the asset.
In cases where the assets are worth significantly more than the available exemption, you probably would have filed a Chapter 13 bankruptcy rather than a Chapter 7. For example, if you own non-exempt real estate with a value of $25,000, it is going to be very difficult to negotiate any type of quick settlement with the trustee for this amount of money. The Chapter 13 case is designed to give you up to five years to pay back creditors to protect assets in this type of situation. However, when the non-exempt equity is less than $3,000, generally Chapter 7 is the better way to deal with the asset. It is definitely in your interest to work out some type of short term payment arrangement with the Chapter 7 Trustee so that you case can be concluded more rapidly. Chapter 13 cases are more expensive and more complicated. It will always be your decision whether to handle an asset problem with a Chapter 13 case but, of course, we will give you our opinion on the best way to deal with any potential asset.
In addition, it is important to keep in mind that you will have the opportunity prior to the bankruptcy filing to dispose of assets that might otherwise be available to your creditors. For example, in the situation described above where you have a non-exempt vehicle worth $4,000, there would be absolutely nothing wrong with your selling the vehicle prior to the bankruptcy filing in an arm’s length transaction (meaning that it is sold for fair value to someone that is not a friend or family member) and then using those proceeds to pay down your mortgage. As long as the transaction is properly disclosed in your bankruptcy petition, the Court will consider this valid bankruptcy planning. Of course, if you need the second vehicle in the household, then selling it may not make much sense if you are simply going to have to buy another car right after the bankruptcy filing. Every person’s situation is different, and the bankruptcy planning that is available depends upon the urgency of the debt situation and the ability of the client to manage without the asset if it is liquidated.
If there is an asset that you wish to protect, we can almost always negotiate a satisfactory payment arrangement with the trustee. Each trustee has different personal parameters regarding time frames for a settlement. However, if you make a reasonable proposal to the trustee, he or she will generally give you six months or longer to “buy back” the equity in the asset. Sometimes, the trustees even wait until you receive your tax refund for the following year in order to fund the settlement. If yours is an asset case, we will negotiate with the trustee on your behalf.
REAFFIRMATION OF MORTGAGES
If you are current on the mortgage and taxes against your property, you will definitely be able to keep the property as long as you continue to make the payments after the bankruptcy and are willing to sign what is known as a “reaffirmation agreement.” Basically, this agreement states that you are willing to abide by the terms of the original mortgage loan without change. In most cases, the mortgage company will prepare and mail us the reaffirmation agreement within about 30 days after the bankruptcy filing. The reaffirmation agreement will be mailed to you with instructions on how to complete it. It is extremely important that you supply all of the information requested in the reaffirmation agreement, including up-to-date information regarding your income and expenses. An incomplete reaffirmation agreement will be rejected.
In some instances, mortgage lenders do not provide reaffirmation agreements. There is nothing that we can do to force the lender to prepare an agreement or sign one. However, as long as you continue to make your mortgage for the property, the bank will not take any action against your property.
The situation with second mortgages is slightly different. This category includes home equity loans, home improvement loans, and home equity lines of credit. We are often reluctant to allow clients to reaffirm these obligations, especially those with higher interest rates and payments. If you reaffirm the debt, the lender not only has the option for foreclosing the mortgage but also suing you directly on the promissory note. In fact, in most non-bankruptcy situations, banks that hold these secondary loans are more likely to sue you on the promissory note, obtain a judgment, and garnish your wages than they are to foreclose on the property. A simple example will help you understand the bank’s reasoning:
Let us assume that you have a home that is worth $100,000 and a first mortgage with a balance of $85,000. Your second mortgage is $15,000. If you stop paying the second mortgage, the lender could foreclose against your property. However, this would cost the lender several thousand dollars in legal fees and Court costs. Also, when the bank concludes the foreclosure process, it will end up either having to pay the entire first mortgage balance or attempting to market the property subject to this mortgage. Certainly, it is unlikely that a lender is going to want to front $85,000 in order to collect a $15,000 loan.
Even if the lender ends up as the successful bidder at the foreclosure auction, it would then have to resell the property. As a general rule, resale costs run about 10 per cent of the property’s value. So, in our $100,000 property example, the bank may recoup $90,000 from the sale of the property, less the $85,000 mortgage that it has paid, and the few thousand dollars that it has expended in legal fees. Obviously, you can see why a bank is not particularly interested in collecting the mortgage debt in this manner.
A mortgage is always backed by a promissory note. This means that the bank has the right to sue on promissory note and obtain a money judgment. A money judgment can be enforced by means of wage garnishment or bank account restraint. It is often much easier for the bank to collect second mortgages in this manner.
If you reaffirm a home equity loan, you are committing yourself once again to all of the terms of the original agreement. This means that, in the event of a default, the lender can pursue you for a judgment. On the other hand, if you do not reaffirm the debt, the bank’s only remedy is to foreclose on the mortgage. As long as the mortgage is paid on time, it is unlikely that the bank is going to take any action against you. However, if you suffer some type of serious financial setback and are unable to pay the mortgage, at least you will have some protection against the personal liability.
Some lenders will actually contact our office and offer the client better terms if they agree to reaffirm the debt. Their incentive, of course, is to obtain your personal responsibility for the debt. If they offer you a good enough deal, it may well be worth your while to reaffirm the obligation, especially if you think that you financial situation is strong enough. We encourage every client with a second mortgage to contact their lender to see if they are willing to offer better terms in connection with the reaffirmation. While the choice in reaffirming the obligation is generally left up to you, as your attorney we must confirm that we think it is in your best interest to do so. Unless there is a compelling reason to reaffirm a second mortgage, such as better terms, we are unlikely to support it.
REAFFIRMATION OF CAR LOANS AND OTHER DEBTS
The situation with automobiles is somewhat similar to that involving real estate. However, we will almost always encourage a client to sign a reaffirmation on a car because some lenders may actually repossess your vehicle if you do not reaffirm the debt, even if you have been making timely payments on the loan. This is extremely rare, but the lender does technically have this right. Therefore, unless you owe considerably more money on the vehicle than it is worth or if the interest rate is incredibly high, we will have you reaffirm the debt.
The banks also indicate that a client who reaffirms an automobile loan is much more likely to get sympathy in the event they fall behind a month or two on the payments. We are certainly not encouraging you to ever miss a payment, but if you do not reaffirm the obligation, you may well find that the lender picks up the vehicle if you are only 30 days late. If you do reaffirm it, you might find the lender much more willing to place delinquent payments at the end of the loan or simply give you more time to get caught up.
Automobile leases are technically not loans. As long as you continue to make the lease payments, the lender is going to allow you to keep it. In some cases, the lender will provide us with a “lease assumption agreement. “ This is similar to a reaffirmation agreement in the sense that it makes you personally responsible for all sums due under the lease agreement. We are reluctant to have clients sign these agreements unless they are within the mileage allowance on the vehicle and do not anticipate any wear and tear charges. If you are close to the end of the lease, there is probably not much point in signing a lease assumption agreement because you may end up paying considerable sums to the lender in exchange for the relatively minor benefit of keeping the vehicle for only a few more months. Remember, you always have the option of surrendering a leased vehicle and being relieved of the monetary obligation in connection with your Chapter 7 case. You should carefully consider whether the benefits of retaining the vehicle outweigh the possible risks or costs.
Reaffirming Unsecured Debts
We are often asked by our clients whether they will be allowed to keep a credit card or store charge account after they have filed a bankruptcy case. In the past, certain lenders were known to offer reaffirmation agreements on unsecured debts. However, we have not received a reaffirmation contract from a credit card company in many years. Occasionally, we will receive a request from a credit union or local bank for a client to reaffirm a small, unsecured obligation, such as an overdraft line of credit. If the debt is a few hundred dollars and you have a very strong relationship with the lender, then we would be willing, to support the reaffirmation of the debt. However, if the debt is going to create even the slightest strain on your budget, we will not support reaffirmation of the debt.
PRE-DISCHARGE FINANCIAL MANAGEMENT EDUCATION COURSE
In order to receive a discharge in either a Chapter 7 or Chapter 13 case, you must take a Financial Management Education class. Fortunately, the class does not have to be taken in person. In fact, the vast majority of our clients take the class either online or by phone. The purpose of the course is to provide guidance in establishing a monthly budget and understanding the true costs of credit.
There are dozens of approved providers for the course. Our website contains a fairly up-to-date list. You can also visit the website of the United States Trustee for information regarding approved providers.
The course can be taken at any point after the actual bankruptcy filing. We encourage you to take it prior to the meeting of creditors in your case, so that you can hand the certificate to the attorney that appears with you. You technically have until 60 days after the meeting of creditors to complete the course because this is normally the date on which the Court would issue the discharge. If the Court has not received the form confirming that the course has been completed prior to the discharge issuance date, then your case will be closed with a discharge. Failure to obtain a discharge in the case is essentially the same as not having filed a bankruptcy at all. Creditors have the right to pursue you once again for all of the debts that were listed on your bankruptcy petition.
If you are suffering from a true physical disability or are placed on active military duty after the bankruptcy filing, then you may be able to obtain a waiver of the course requirement. However, if you complete the course within a few days after the filing of your bankruptcy case, it is unlikely that you will need the waiver, and there is no guarantee that a waiver would be approved.
It is possible to re-open a closed bankruptcy case to file the discharge certificate. However, there is a Court filing fee of approximately $250 simply to re-open the case. You will also incur legal fees for the motion that is necessary to re-open the case.
CHAPTER 7 DISCHARGE
Although the filing of the bankruptcy petition gives you relief from your creditors, it is the discharge that permanently eliminates the obligation to pay dischargeable debts. In most cases, you will receive your discharge approximately 60 days after the first meeting of creditors in the bankruptcy case. However, there are a few exceptions to this rule. First, if your case is an asset case and you are still paying the Chapter 7 Trustee, then your discharge will be withheld until your final payment to the trustee under the terms of the negotiated agreement. Second, the trustee can hold open the meeting of creditors in the case for several months if he or she requires additional information. In such cases, the trustee will probably ask that the discharge be withheld at least temporarily.
The bankruptcy discharge covers most bills, such as credit cards, medical bills, utility bills, repossession debts, and deficiency balances that may remain after the surrender of a car or a home. However, as you probably know, the discharge does not cover all debts. The following is a list of debts that cannot be discharged in a Chapter 7 bankruptcy case:
1. Domestic support obligations. This broad term includes support obligations, alimony, maintenance, and even property settlement payments. It even covers awards of attorney’s fees made in connection with child support proceedings or divorce actions. Also, if the government paid any medical bills in connection with the birth of the child or in assisting the parent in raising the child, these debts to the government agency cannot be discharged.
2. Income taxes. Personal income tax liabilities can be discharged in a bankruptcy case as long as they meet the following criteria:
a. The tax debt predates the bankruptcy by more than three years, as measured by the due date for the tax return. For example, the 2008 tax return was due on April 15, 2009. Therefore, the tax debt would be dischargeable as of April 15, 2012. If you file the tax return before the due date, this does not start the three year time period running any sooner.
b. The tax return must have been filed at least two years prior to the
filing of the bankruptcy. If you filed your tax returns late, you will still have to wait at least two years before the tax can be discharged in a bankruptcy. For example, you may have just filed your tax return for calendar years 2004, 2005, and 2006. Although these tax returns are clearly more than three years old, you will also have to wait two years from the date they are filed in order to discharge the debt. The Government always has the option of objecting to the discharge of taxes owed under these circumstances if they convince the Court that there is a pattern of fraud or willful failure to file tax returns. If the failure to file the returns is due to negligence only, the IRS will probably not object to discharge.
3. Sales tax and other trust fund debts. Earlier in this guide, we covered this topic in great detail. We will simply remind you that tax debts in the nature of sales taxes or payroll withholding taxes can never be discharged in a bankruptcy petition, regardless of the age of the tax or the year in which it is incurred.
4. Student loans. It is almost impossible to discharge any type of student loan in a bankruptcy case. Most loans have at least some partial backing from a state or federal agency, and if this is the case, the loan cannot be discharged except in the case of “undue hardship.” This term does not simply mean that it is difficult for you to repay the loan. It means that you have suffered some type of catastrophic, permanent change in your life that prevents you from paying even a portion of the loan during your life time. An example of this would be a disability that prevents you from working and that forces you to survive only on disability benefits. In reviewing your ability to discharge a student loan, the Court will look at not only your income but also the income of your spouse or other household members.
Even student loans that are not guaranteed but that have some type of contribution from the school’s endowment cannot be discharged. For example, if you attended Cornell University and received loans directly from the school, these loans were probably funded by the school’s endowment, and this would render the loans non-dischargeable. While we will always talk to you about the specifics of your student loan, you should assume going into the bankruptcy process that the student loans will survive the bankruptcy.
Nevertheless, if you are behind on the student loans before the bankruptcy filing, you might find the student loan company much more agreeable to some type of repayment arrangement with you once the bankruptcy is discharged. We encourage every client that has a student loan in default to contact the lender to see if they will work out new payments terms. Obviously, when you exit the bankruptcy, you want your credit to improve as quickly as possible. Working out an arrangement with the student loan company that brings the loan back to a “current” status will help your credit rating tremendously in the long run. If the loan remains in the default posture, it will continue to hurt your credit even if you discharge the remaining debt.
5. Debts Incurred by Fraud. It is fairly uncommon to see objections to discharge based on fraud. However, they do appear from time to time. The most common objections are based upon false credit applications made in connection with a personal loan. Local credit unions tend to review bankruptcy filings much more carefully, and if they believe that you have intentionally overstated your income, an objection is possible. Also, in some cases, credit unions will require that you close your credit card account as a condition of granting a loan. If you use the same credit cards after taking out the credit union loan, it is possible that you will receive an objection from the credit union on this basis.
An objection filed by one creditor does not affect your ability to discharge the debts of other creditors. If an objection is filed, you do have the option of defending the objection and having the Judge make a determination. If we think that you have a strong defense, certainly we will encourage you to defend the litigation, unless the amounts involved are not significant enough to justify the expense of litigation. If we believe that the creditor has a strong objection, we may recommend that you attempt to settle it by agreeing to pay a portion of the debt without interest over some period of time after the bankruptcy discharge. The settlement would also be conditional upon no negative reporting of the debt subsequent to the bankruptcy discharge.
6. Prior Bankruptcy Filings. You cannot obtain a discharge in a Chapter 7 case if you have filed another Chapter 7 case within eight years of the date you filed the present case. Many people think that the eight years is measured from the date that the prior bankruptcy is discharged. This is not correct. It is always the filing date of the bankruptcies that control for discharge purposes. There are also rules that apply in obtaining a Chapter 7 discharge after a Chapter 13 discharge. This tends to be a less frequent occurrence. Generally, if a client has filed a Chapter 13 case that has not been successful, it will either have been dismissed or converted to a Chapter 7. We will always review any prior bankruptcy filing to determine whether there is a possibility that you will not receive a discharge.
WHY PEOPLE FILE CHAPTER 13
MORTGAGE AND TAX ARREARS
By now, you probably realize that bankruptcy can assist you in dealing with past due mortgage payments on your home. In fact, the bankruptcy laws are so powerful that they can actually stop a mortgage foreclosure sale up until the point the property is sold at a public auction. Whether you are a few months late on your mortgage or even two years, Chapter 13 can help you to save your property from foreclosure, as long as the case is filed before the auction. In a Chapter 7 bankruptcy, a foreclosure action can be halted temporarily by the filing of a bankruptcy case. However, the bank will quickly obtain permission from the Bankruptcy Court to resume the foreclosure action. If you file a Chapter 7 bankruptcy, you will only be able to keep the property if the mortgage is current or is brought current quickly (within a matter of weeks) after the filing of the bankruptcy case. Chapter 13 bankruptcy gives you up to five years to get caught up on delinquent mortgage payments, regardless of the amount of delinquency or how far into the foreclosure process you may be.
Although Chapter 13 bankruptcy is a very effective way to deal with mortgage problems, you must resume making your mortgage payments immediately following the filing of your bankruptcy case. The bankruptcy does not change the fundamental terms of your mortgage. It only helps you with the arrears. So it is your responsibility to start making regular mortgage payments and keep them current during the entire term of your Chapter 13 plan.
Delinquent real estate taxes are treated in basically the same manner as mortgage arrears. However, be aware that, over the past couple of years, the local municipalities have become more aggressive in pursuing tax foreclosure actions. In the City of Buffalo, foreclosure actions are commenced even for water and user fee charges totaling less than $1,000. In 2010, the City of Buffalo, commenced foreclosure proceedings on more than 4,000 properties. Similarly, most counties in Western New York are pursuing tax foreclosures with much less compassion.
Technically, if you do not pay your taxes prior to the “date of redemption” set by the municipality, it becomes the absolute owner of your property. Most people believe that a property is only lost for taxes at the time of the auction. However, this is definitely not true. Recent cases decided in the local courts have confirmed that a tax auction is actually a resale of the property. If you are behind on your tax payments and cannot bring them current prior to the date of redemption, you will most definitely have to file a Chapter 13 bankruptcy.
As with mortgage arrears, a Chapter 13 bankruptcy will give you up to five years to get caught up on delinquent taxes, water charges and user fees against the property. Of course, you must make future tax payments as they become due, but the municipality cannot take any action against you for the delinquent debts as long as you are under the protection of the Chapter 13 plan.
REPAYMENT OF TAX LIENS AND PRIORITY DEBTS
In a Chapter 7 bankruptcy, tax liens held by the Internal Revenue Service,
or New York State, will survive your bankruptcy discharge. Even if the underlying debt is old enough to be discharged, the lien itself cannot be removed in the context of a Chapter 7 bankruptcy. Unlike judgment liens that can be removed in a Chapter 7 case against your home, IRS and NYS tax liens are considered statutory liens, and there is no mechanism to void them in a Chapter 7 case.
Chapter 13 bankruptcy does provide a way to reduce IRS and NYS statutory tax liens, if the equity available in your home and other property is less than the amount of the lien. A significant percentage of people who file Chapter 13 bankruptcy have very little equity in their home because of high mortgage balances, and their personal property may not be worth all that much. Therefore, Chapter 13 bankruptcy is a very effective way to deal with tax liens. To the extent that the liens cannot be removed in the Chapter 13, they will be repaid over the five years of your Chapter 13 plan.
Most recent income taxes cannot be discharged in any type of bankruptcy. Sales tax, withholding taxes, and other “trust fund” taxes are never dischargeable in a bankruptcy case. However, Chapter 13 will give you up to five years to repay these priority debts with potentially two additional benefits. First, if no tax lien has been filed, any penalties that have accrued against the debt may be dischargeable. Second, neither the Internal Revenue Service nor New York State is currently requesting interest on tax debts paid through the Chapter 13 plan. Therefore, even if you have payment arrangements in place with the IRS and NYS on your taxes, you will probably get a much better deal paying them through the Chapter 13 plan. Remember, any installment plan negotiated with NYS or the IRS will require that you pay all of the penalties (typically about 25% or higher of the amount that you owe). Also, you will be charged ongoing interest on the entire debt until it is paid. It is my opinion that Chapter 13 is still significantly underused as a mechanism to deal with tax liabilities.
Many people think that the offers made in a compromise process provide an easier way to resolve taxes. In fact, offers in compromise are never easy, and a significant percentage are rejected unless there has been some type of catastrophic, permanent change in income. The IRS generally must believe that there is simply no way that it is ever going to collect the debt in order to agree to an offer in compromise. It is almost impossible to negotiate any type of compromise with NYS on any type of personal income tax debt or sales tax liability. Be very careful of any company that promises to settle your tax debt for a few cents on the dollar. If we think that an offer in compromise is possible, we will refer you to the best tax attorney (in our opinion) in Western New York.
RESTRUCTURING AUTOMOBILE AND TRUCK LOANS
Chapter 7 bankruptcy does not allow you any flexibility on automobile loans. If you wish to keep the vehicle, the loan must be current or brought current at the time of the bankruptcy, and you must make the ongoing payments exactly as specified by the contract. Many clients file Chapter 13 bankruptcy because they are behind on their vehicle loans, have payments that they cannot afford, or owe considerably more on the vehicle than it is worth.
Chapter 13 bankruptcy always allows you to restructure an automobile loan and extend the payment term up to five years. So, for example, if you owe $6,000 on your vehicle now and have monthly payments of $500 per month, a Chapter 13 bankruptcy could extend the loan up to 60 months with payments as low as $100 per month (plus interest). Obviously, it is not always wise to extend a loan, particularly if the vehicle is not going to last for the entire duration of the Chapter 13 plan. However, for some people who are struggling to make ends meet, this type of flexibility is very important.
If you acquired the vehicle loan more than two and a half years prior to the date of the bankruptcy filing, Chapter 13 also allows you to eliminate the portion of the loan that exceeds the vehicle value. For example, if you have a 2007 Ford truck worth $10,000, but you still owe $18,000 on it, then you can eliminate the $8,000 “undersecured” portion and basically treat it like any other unsecured debt. The balance of the vehicle loan that cannot be removed will be paid over the three to five years of your bankruptcy plan. Regardless of whether you can reduce the principal balance owed on the vehicle, it is almost a certainty that we will be able to drop the interest rate on your vehicle. At present, the interest rate on vehicle loans paid through a Chapter 13 plan in Buffalo is approximately 4%. In Rochester, it is 5.25%. It is likely that the interest rate that you are paying now is higher than either of these rates.
PROTECTING NON-EXEMPT ASSETS
New York State recently enacted a sweeping overhaul of its exemption laws. We now have one of the most generous series of exemptions in the Country. However, in the event that you have assets that are not exempt, a Chapter 13 bankruptcy will allow you the opportunity to protect these assets while also paying your unsecured creditors the amount that they would have received if the assets were liquidated. For example, let’s say that after application of all available exemptions, there is still $10,000 of equity remaining in your business assets. In a Chapter 7 case, you would either have to pay the Chapter 7 Trustee $10,000 to retain these assets, or the assets would be taken and sold to pay your creditors. With a Chapter 13 bankruptcy, your creditors still have to receive the same $10,000, but they can be paid over the five years of the Chapter 13 plan, rather than in a lump sum. With the new exemptions, it is less likely that people will be forced to file Chapter 13 due to asset concerns. However, there will still certainly be cases in which a Chapter 13 is necessary to protect assets.
EXCESSIVE AMOUNTS OF UNSECURED DEBT
Chapter 7 cases are reviewed carefully by the Office of the United States Trustee. In general, the U.S. Trustee tends to review two areas of the petition more carefully: the amount of your unsecured debt and the amount of your income. The unsecured debt is reviewed to determine whether there is some pattern of spending that can be deemed abusive. For example, if your historical income is only $20,000 per year but you owe $100,000 in credit card debt, the U.S. Trustee could take the position that the debt was essentially incurred without any intention to repay it. The local offices of the U.S. Trustee seem to review cases quite differently from one another. However, it is safe to assume that if you have more than $40,000 in credit card debt or unsecured personal loans, the case will receive more careful scrutiny by the U.S. Trustee.
If we feel that the debt load is difficult to defend, you may be advised to file a Chapter 13 bankruptcy. Although the Chapter 13 Trustee will also review the debt load, there is little risk that the case will be dismissed outright, as could happen in a chapter 7 case. Rather, the chapter 13 trustee will simply focus on the proper percentage that should be paid to your creditors in light of the amount of debt. In reviewing the amount of debt, the U.S. trustee does not typically focus on student loan debt, medical bills, or business debt. It is rare that these types of debts can ever be deemed “abusive.” So, do not be alarmed if your total debt exceeds the $40,000 threshold because of debts of this nature. Also, be assured that in most cases, even a debt in excess of $40,000 is probably not going to be considered abusive. Every case has a unique set of facts, and our office has always been extremely aggressive in seeking chapter 7 relief for our clients when the only question relates to the amount of the debt and there are no other aggravating factors.
TOO MUCH INCOME TO QUALIFY FOR CHAPTER 7
We have discussed the implications of the means testing earlier in this
Guide. If you are not eligible for chapter 7 relief due to the means test, then you can still file a chapter 13 bankruptcy. The amount that you have to pay your creditors will depend upon the means testing calculation, as well as the amount that you are able to pay based upon your actual budget. Remember, the means test uses hypothetical figures for some household expenses. In many cases, these hypothetical expenses actually favor the client and, when we review their actual budget, they have more “extra” income available to pay creditors than shown in the means test. On the other hand, there are certain allowable expenses in chapter 13 that cannot be included in the chapter 7 analysis. The most important of these are pension contributions and loans. It is not unusual to meet a client who “fails” the chapter 7 means test but “passes” the chapter 13 means test because they are repaying significant pension loans or contributing money to their pension plan.
In some cases, even if a client is technically eligible for chapter 7 relief based upon the chapter 7 means testing analysis, the U.S. trustee could still object if they feel that the debtor’s budget actually supports a meaningful repayment in a chapter 13 case. A recent case decided by the local bankruptcy court is a good example of this situation. In that case, the debtors were both retired and received social security and pension income. They passed the chapter 7 means test because their social security income was not included in the means testing calculations. However, the debtors were seeking to retain an expensive boat, with monthly payment and maintenance fees of approximately $800 per month. The court dismissed the chapter 7 case because it agreed with the U.S. trustee that the debtors could have paid their creditors in full in a chapter 13 plan, if they gave up the boat. The court was unwilling to condone the lifestyle choice of maintaining the boat at the expense of the debtors’ creditors.
The court’s decision does not stand for the proposition that you have to give up your assets in a chapter 7 case. Every case has its unique set of facts. For example, the court routinely allows people to retain expensive leased vehicles and homes. Also, the local courts have been very generous in allowing certain education-related expenses, such as private school tuition, even in amounts as high as $1,000 per month in some cases.
In a chapter 13 case, the trustee is going to review not only the income of yourself and your spouse, but also the income of any other people in the household. This includes parents, adult children, siblings, significant others and roommates. It does not necessarily matter whether these other people are actually contributing to your budget. The point of the analysis is to determine whether there is potential, additional income in your household that should rightfully be available to pay your unsecured creditors additional sums. Many people find this inquiry into the income sources of other household members intrusive, and I certainly agree. In fact, my office has consistently opposed this analysis in appropriate cases. However, as a general rule, the Court sides with the Chapter 13 Trustee on this issue, and remember that for most households the inclusion of additional income actually helps the Chapter 13 plan become feasible.
When you consult with our office regarding a Chapter 13 filing, we will carefully review not only the income of other people in the household but also their expenses. Generally, if other household members are not contributing to the household budget, it is precisely because they have their own expenses that have to be paid each month and, therefore, do not have any extra income to contribute.
PRIOR BANKRUPTCY CASES
If you have received a discharge in a Chapter 7 case commenced less than eight years before the current bankruptcy, then you are not eligible for Chapter 7 relief. It is actually quite common to see people face significant debt problems within this eight year period. While some people view repeat bankruptcy filings as abusive, keep in mind that many times the causes of the first Chapter 7 filing are not related to overspending but rather a significant life event. For example, many people have to file bankruptcy after going through a divorce or separation. The bankruptcy eliminates the accumulated debt from the marriage, but both spouses now have to maintain separate households. It is likely that their budgets are strained every month even just paying basic living expenses such as rent, car payments and utilities.
Even relatively minor setbacks, such as a loss of employment for a few months can be enough to prompt another bankruptcy filing. There may be accumulated utility bills, a vehicle repossession, or personal loans taken out to get people through difficult times in their lives. A few missed paychecks for people living on a strict budget can be enough to force another bankruptcy filing.
An individual is entitled to Chapter 13 relief at any point after a Chapter 7 discharge. However, a discharge in a Chapter 13 case will only be issued if the case is filed more than four years after the date of the prior Chapter 7 filing. There are circumstances in which people file Chapter 13 cases even before the four years even knowing they cannot get a discharge. The discharge may not always be that important. For example, the purpose of the Chapter 13 filing may be to stop a foreclosure action, and the client may not particularly care about the other debt. Also, as a practical matter, many creditors never pursue debts that are not discharged in a bankruptcy case. It is difficult for a creditor to monitor the status of an unsecured debt for the three to five years that a person is in a bankruptcy plan. The mere filing of the bankruptcy is typically sufficient to stop creditor collection action permanently. On average, about ten to twenty per cent of our clients have prior bankruptcy filings.
CONTENTS OF CHAPTER 13 PLAN
If you file a Chapter 13 case, a formal plan has to be presented to the Bankruptcy Court that contains, at a minimum, the following information:
1. The term of the plan. This can be anywhere from 36 to 60 months, depending upon the income and the types of debts that are owed.
2. The monthly payment to be made under the plan. In most cases, the payments are deducted directly from your wages. This is not a wage garnishment. It is a voluntary payment, but the Court prefers to have it deducted directly from your wages in order to make sure that it is actually paid as required. The statistics show that Chapter 13 clients with wage orders have a much higher success rate in completing their plans. The most recent statistics that I reviewed showed an approximately 3 to 1 success ratio. Obviously, in some situations, wage orders are not possible, such as for clients on fixed income or those who are self-employed.
3. The treatment of secured claims. If you have a mortgage, you will be required to make your ongoing mortgage payments directly. Any mortgage arrears, including bank legal fees and court costs will be included in the plan repayment. Real estate tax arrears are also included in the plan, but you are responsible for future tax payments as they become due. Car loans may or may not be included in the plan, depending upon the term of the loan, the amount owed, the value of the vehicle and the applicable interest rate.
4. Payment of priority claims. All priority payments, including certain federal and state taxes and domestic support obligations must be paid in full in a Chapter 13 plan. For additional information regarding priority claims, please refer to the section on priority debts earlier in this guide.
5. General unsecured claims. In most cases, these debts can be paid at only a fraction of the amount owed. Typically, the percentage can be as low as five per cent, but the exact percentage is based upon your income and the value of your assets.
If this all seems very complicated to you, do not worry. Chapter 13 is much more complicated than Chapter 7, but we assure you that you will understand the process when your case is ready to be filed. For now, it is simply important to know what Chapter 13 plans are intended to accomplish.
INITIAL CHAPTER 13 HEARING
The first meeting of creditors (also known as the Section 341 meeting) is the first opportunity for the Chapter 13 Trustee and any creditors to talk to you regarding your Chapter 13 plan. In Chapter 7 cases, the Trustee tends to focus more on the value of assets and any transfers that may have taken place prior to the bankruptcy filing. While, of course, the Chapter 13 Trustee will also review these same issues, the Trustee will focus more heavily on the household budget and on the claims that have to be repaid in the Chapter 13 plan. Prior to the hearing, the trustee always reviews the bankruptcy petition carefully and even reviews the pay stubs filed with the bankruptcy petition to verify that the income figures listed on the budget are consistent with the pay stubs. The Trustee will also look at historical income for the past two years and may ask questions regarding any significant changes.
Typically, the only creditors that appear at the initial meeting of creditors are representatives of your mortgage lender if you are behind on your mortgage. Sometimes, if you have a car loan with a local credit union or bank, a representative will appear as well. In most cases, the mortgage lenders and banks have no problem with the bankruptcy filing in general. They just want to make sure that their claims are properly paid through the case and that the values placed on the assets are correct.
In order to protect their rights, the mortgage lender or car lender may file a formal “objection to confirmation.” If you receive one of these, do not be too alarmed. In most cases, the objection simply has to do with a mathematical calculation or a discrepancy in the amount estimated in your plan as opposed to the amount actually owed. In almost all cases, these discrepancies can be resolved so that the case can proceed to confirmation.
The Chapter 13 Trustee generally reviews five or six cases per hour, giving about 10 to 12 minutes per case. This is only a fraction of the time that will have gone into preparing the bankruptcy, but due to the high volume of Chapter 13 cases filed, this is really all the time that can be allotted to each individual case. If any significant issues arise at the first hearing, the Trustee may adjourn it to a later date for submission of additional paperwork. For example, it is very common for clients to switch jobs or experience other changes in income even during the few weeks after the bankruptcy filing. Also, there are instances where clients have unfiled tax returns that have to be addressed. Sometimes, motions to avoid liens have to be filed or objections must be made to mortgage arrears or other claims.
If your case has to be adjourned, do not worry. It is better to come back a second time than to have your case rushed in front of the Judge when there are still open issues. In some instances, there is simply a disagreement between the trustee and the client’s attorney as to the proper contents of the plan. In those instances, the issue will be presented to the Court for determination. However, it is always better to have the support of the Chapter 13 Trustee prior to the confirmation hearing. As a general rule, the Court defers to the Chapter 13 Trustee on factual issues and questions of “good faith” that may arise. For example, if the trustee feels that your budget contains too many discretionary expenses, he may ask for a higher payment to your unsecured creditors. You should not take the trustee’s position in your case personally. The trustees in both Buffalo and Rochester are, in my opinion, extremely fair and reasonable. Remember, their primary obligation is to protect your creditors, and this can sometimes result in a final plan that is different from the one that we proposed.
In general, our plans are confirmed roughly upon the terms on which they are filed. If we expect that the trustee may object to certain items in the budget, we will let you know this ahead of time, and we will negotiate the best possible resolution with the trustee under the circumstances of your case.
After the meeting of creditors is concluded, you will have to appear before the Bankruptcy Judge for a formal confirmation hearing. The Judge generally asks very few questions, and in a case that has been recommended for confirmation, it is unlikely that the Judge is going to second guess the Trustee. Sometimes, the Judge has independent concerns regarding budget items or the treatment of unsecured creditors. Obviously, the Judge has the final say on whether a case is approved, and any requirements imposed by the Judge as a condition of confirmation must be satisfied.
We understand that many clients are extremely nervous about these hearings, but rest assured, all of the Judges in the Western District of New York are fair-minded and want to see your case succeed. It is never possible to tell you with certainty how a judge will feel about a particular case. The judges are individuals and each has issues on which they tend to focus more intently. In the end, most clients are satisfied with the final version of their plan that is confirmed.
MODIFICATION OF CHAPTER 13 PLANS AFTER CONFIRMATION
In these uncertain economic times, it is unlikely that the three to five years of your Chapter 13 plan will pass without some change in your finances. Hopefully, the changes will be for the better, but there are of course times when people lose their jobs or suffer other unforeseeable setbacks. The Order of Confirmation does require that you report any increase of income of ten per cent or more to the Chapter 13 Trustee. It is unlikely that the Trustee will ask for any change in your plan payment based upon cost of living adjustments in your paycheck or other minor increases. However, if there is a significant increase, the Trustee could request modification of your plan.
If your income decreases, in some cases it may be possible to reduce your plan payments. It may also be possible to extend your plan to 60 months if your plan is not already scheduled to last that long. However, keep in mind that when we file your case, we generally propose as low a dividend as possible to your unsecured creditors. Therefore, unless you are paying a significant percentage to unsecured creditors solely due to income concerns when your case was filed, it is not probable that we can decrease your payments significantly, even if you do lose income.
If you fall behind on Chapter 13 plan payments, it is generally possible to propose some type of modification that gives you time to get caught up on the delinquent payments. In some cases, these modifications must be brought by formal motion. In other cases, they can be arranged more informally through the exchange of correspondence with the Trustee.
It is more difficult to modify plans that include payments on your automobile loans. The auto lender may object to any plan modification because, if you are delinquent in your plan payments, they have probably not been receiving enough money to cover even the depreciation on the vehicle. We will always do our best to work out a modification that allows you to protect the vehicle, but sometimes this requires significant payments to the auto lender as a condition of the modification.
MOTIONS FOR STAY RELIEF
One of the most common reasons that Chapter 13 plans fail is that the client falls behind on mortgage payments after the filing of the bankruptcy case. While your Chapter 13 plan will assist you with any mortgage arrears that you incur prior to the bankruptcy filing, there is little that the Court can do if you fall behind on your post-bankruptcy mortgage payments. When mortgage payments become delinquent by 30 to 60 days, it is common practice for the mortgage lender to file what is known as a “motion for relief from the automatic stay” with the Bankruptcy Court. This is a request by the lender to commence or resume foreclosure proceedings due to the post-bankruptcy default. In most cases, we are able to arrange short extensions of 30 to 60 days for the client to bring the account current. However, this essentially means that the client has to make double or triple mortgage payments, and this is obviously difficult on budgets that are already very tight in Chapter 13 cases. While we can generally help you with most other situations that arise in a Chapter 13 case, we cannot emphasize enough the importance of staying current on your mortgage payments.
Even if you are making your mortgage payments on time, you might become involved in a dispute with the lender regarding the status of your mortgage payments. Mortgages are often sold or transferred from lender to lender. Moreover, particularly with mortgages involved in active bankruptcy proceedings, and the bank’s records are often not very good. If you become involved in a dispute regarding mortgage payments after the bankruptcy filing, it is absolutely your responsibility to prove that the mortgage payments were made. It is not the bank’s responsibility to prove that payments were missed. Therefore, we instruct every client to maintain perfect records regarding every single mortgage payment made since the bankruptcy filing.
Keep in mind that the dispute with the lender may not arise until the second or third year of your plan, in which case you may have to prove that dozens of mortgage payments were made. If you cannot prove that the payment was made, the Judge will rule in the bank’s favor on the issue. In fact, in Rochester, the Judge will generally not even allow a debtor to oppose a motion for stay relief if the debtor does not supply proof of all payments that have been made. It is extremely important that you maintain proof of your mortgage payments as they are made. Acceptable proof consists only of the following:
• copy of the receipt given to you by the bank if payment is made in person
• copy of the front and back of the canceled check
• copy of any money order or bank check made to the lender
Obviously, it is easiest to keep track of your payments if you pay by check. Your canceled check will always be your proof. If the bank does not cash the check, you can always supply the Bankruptcy Court with bank account statements showing that the money was available in the account for the check to clear. If you write a check to the mortgage company and it is not cashed promptly, you must maintain sufficient funds in the account to cover it at all times. We have seen instances where the banks take 30, 60 or even 90 days to cash mortgage checks.
CHAPTER 13 DISCHARGE
A Chapter 13 bankruptcy discharge covers most bills, such as credit cards, medical bills, utility bills, repossession debts, and deficiency balances that may remain after the surrender of a car or a home. However, as you probably know, the discharge does not cover all debts. The following is a list of debts that cannot be discharged in a Chapter 13 bankruptcy case:
1. Domestic support obligations. This broad term includes support obligations, alimony, maintenance, and even property settlement payments. It even covers awards of attorney’s fees made in connection with child support proceedings or divorce actions. Also, if the government paid any medical bills in connection with the birth of the child or in assisting the parent in raising the child, these debts to the government agency cannot be discharged.
2. Income taxes. Personal income tax liabilities can be discharged in a bankruptcy case as long as they meet the following criteria:
A. The tax debt predates the bankruptcy by more than three years, and is
measured by the due date for the tax return. For example, 2008 tax return is due on April 15, 2009. Therefore, the tax debt would be dischargeable as of April 15, 2012. If you filed the tax return early, this does not start the three year time period running any sooner.
B. The tax return must have been filed at least two years prior to the filing of the bankruptcy. If you filed your tax returns late, you will still have to wait at least two years before the tax can be discharged in a bankruptcy. For example, you may have just filed your tax return for calendar years 2004, 2005, and 2006. Although these tax returns are clearly more than three years old, you will also have to wait two years from the date they are filed in order to discharge the debt. The government always has the option of objecting to the discharge of taxes owed under these circumstances if they convince the Court that there is a pattern of fraud or willful failure to file tax returns. If the failure to file the returns is due to negligence only, the IRS will not object to discharge.
3. Sales tax and other trust fund debts. Earlier in this guide, we covered this topic in great detail. We will simply remind you that tax debts in the nature of sales taxes or payroll withholding taxes can never be discharged in a bankruptcy petition, regardless of the age of the tax or the year in which it is incurred.
4. Student loans. It is almost impossible to discharge any type of student loan in a bankruptcy case. Most loans have at least some partial backing from a State or Federal agency, and if this is the case, the loan cannot be discharged except in the case of “undue hardship.” This term does not simply mean that it is difficult for you to repay the loan. It means that you have suffered some type of catastrophic, permanent change in your life that prevents you from paying even a portion of the loan during your life time. An example of this would be a disability that prevents you from working and that forces you to survive only on disability benefits. In reviewing your ability to discharge a student loan, the Court will look at not only your income but also the income of your spouse or other household members. Even student loans that are not guaranteed but that have some type of contribution from the school’s endowment cannot be discharged. For example, if you attended Cornell University and received loans directly from the school, these loans were probably made by the school’s endowment, and this would render the loan non-dischargeable. While we will always talk to you about the specifics of your student loan, you should assume going into the bankruptcy process that the student loans will survive the bankruptcy.
However, if you are behind on the student loans before the bankruptcy filing, you might find the student loan company much more agreeable to some type of repayment arrangement with you once the bankruptcy is discharged. We encourage every client that has a student loan in default to contact the lender to see if they will work out new payments terms. Obviously, when you exit the bankruptcy, you want your credit to improve as quickly as possible. Working out an arrangement with the student loan company that brings the loan back to a “current” status will help your credit rating tremendously in the long run. If the loan remains in the default posture, it will continue to hurt your credit even if you discharge the remaining debt.
5. Prior Bankruptcy Discharges. The waiting period between Chapter 13 discharges is very different from the waiting periods between Chapter 7 discharges. Although you have to wait eight years to obtain a Chapter 7 discharge after the filing date of a prior Chapter 7 case, you can obtain a Chapter 13 discharge only four years after obtaining a Chapter 7 discharge. Also, if you have received a prior Chapter 13 discharge, the waiting period is only two years.
You may wonder why somebody would file a Chapter 13 bankruptcy so soon after receiving a discharge in a prior Chapter 13. There are actually a few reasons. The most common are as follows:
1. You have just completed a Chapter 13 bankruptcy. During the term of that bankruptcy, you fell behind on real estate taxes, mortgage payments, or medical bills. As a result, a new Chapter 13 filing is necessary in order to protect your home and to deal with debts that you simply cannot afford to pay. Remember, almost everyone in a Chapter 13 case is living on a very tight budget. Despite your best efforts, even a few thousand dollars in accumulated debt may be beyond your ability to repay without another bankruptcy filing.
2. You may have successfully completed a Chapter 13 bankruptcy and then lost your job or main source of income. This is actually a fairly common occurrence in today’s economy. Regrettably, we have seen many instances in which clients have done a tremendous job in completing a Chapter 13 plan only to fall behind on their mortgage payments, car payments, or other debts simply because they lost their job within weeks or months after the completion of their prior bankruptcy.
3. The completion of your prior Chapter 13 case was early because your mortgage lender obtained permission to resume foreclosure proceedings. Let’s say that your Chapter 13 case is designed to pay mortgage arrears and just a few thousand dollars in unsecured debt. During the Chapter 13 case, you fall behind on your mortgage payments, and the bank petitions and obtains relief from the Bankruptcy Court to commence or resume foreclosure proceedings. As soon as this happens, the Trustee stops paying the mortgage arrears claim from your Chapter 13 plan. Therefore, the only debt that has to be paid in order for you to “complete” your bankruptcy is the remaining unsecured debt. In some instances, the unsecured debt can be paid in a matter of a few months. Although your bankruptcy may not have completed in the manner that you would have wished, you will still obtain a Chapter 13 discharge. Once this happens, you technically have the right to file a new Chapter 13 case.
WHY BANKRUPTCY WILL PROBABLY NOT HURT
YOUR CREDIT IN THE LONG RUN
The most frequent question we are asked by clients filing bankruptcy is whether they will be able to keep their home and car. The second most frequent question is how the bankruptcy will impact their credit in the future. The truth is that most people filing bankruptcy already have significant credit problems. Although some people do come into our office when they are still current on all of their bills, the vast majority do not see us until they are at least a few months behind on their credit card payments, car loans, or mortgages.
We always tell clients that the decision to file bankruptcy should have absolutely nothing to do with your future credit. It should be based solely upon your present debt situation and your ability to repay your creditors. As a practical matter, if you cannot pay your creditors on time, then your credit score is likely to deteriorate for many years before it levels off and starts to improve.
Traditionally, a good credit score is considered anything over 680. This is generally sufficient for you to obtain vehicle loans and mortgages within a percentage or two of the best interest rates available. To obtain an unsecured credit card with a credit line of more than $1,000, you probably need a credit score of at least 700. It is extremely rare for a client coming into our office to have a score of 680, let alone 700. Typically, by the time a client comes to see us, his or her credit scores are probably is the 500’s or perhaps low 600’s. They could not really obtain credit for anything, except maybe a high interest rate car loan or a secured credit card.
Here is an example of how your credit is impacted when you start to fall behind. Let’s say that you have $20,000 in credit card debt and that you have been making all of the payments on time every month. Your credit score is 710. Even though this is a good credit score, it is very likely that you will still be turned down for any additional credit if your debt to income ratio does not support your ability to pay any of the debt. That is one of the myths of “good credit.” It creates a belief that you are going to be able to continue to take out loans indefinitely and that you are benefiting by making only minimum payments on your credit cards. For most credit cards, it would take about 10 to 15 years to pay off the entire balance, if you are making just the minimum payments. So the real question is how is your “good credit score” helping you if you are straddled with debt and cannot obtain loans for the things that you truly need, such as an automobile or mortgage?
While good credit is important, it is not nearly as important as making sure that you can provide your family with the basic necessities such as a home, safe automobile, utilities, clothing and food. It is very disheartening for me to encounter people that cannot afford to buy their kids clothes because they are paying 20% to 30% interest on credit card debt.
At some point, if your unsecured debt is too high, you are going to start falling behind. You may be a week late one month, and then two weeks the next. Eventually, you will fall 30 days behind on one or more credit cards, and you will experience a significant drop in your credit score. It would not be unusual for your credit score to drop from, say, 700 to 650. It is at that point that a person may finally realize that their good credit was an illusion, and then they essentially give up on paying the creditors. Of course, as the debts continue to fall further and further behind, the credit score will continue to drop.
After about six months, the credit card companies will “charge off” the debt. Some people believe that this charge off means that the debt is no longer being pursued. This is certainly not the case. A charge off is simply a tax designation made by the creditor that allows them to take the uncollected money as a tax deduction on their corporate tax return. The creditor may continue to pursue collection within its internal collection department. More likely, it will either refer the matter on to a collection agency or sell the obligation to a third party debt purchaser. The latter is becoming increasingly more common. For large bank creditors it is simply not worth their time and money to collect individual debts from hundreds or thousands of consumers. Instead, they sell the accounts in large pools to outside companies for a few cents on the dollar. The third party debt purchasers are typically much more relentless in their pursuit of the debts than the original creditor. While some people are under the belief that debts can be settled for 20 or 30 cents on the dollar, that is generally not the case with a third party debt purchaser. We have seen many such creditors refuse to settle debts for less than 75 to 80 cents on the dollar.
By the time the debt is charged off or purchased by a third party, your credit score probably will have dropped from 650 to 600 or less. As long as the debts are not paid, the credit score will continue to drop month after month and probably for many years. How quickly it drops and how much it drops depends upon a variety of factors, including how aggressive a creditor is in pursuing the debt, whether the third party debt purchaser chooses to report the account on your credit report, and your payment history on other debts such as mortgages and car loans. Obviously, if somebody is paying their mortgage and car payment on time, their score is probably not going to drop as fast as someone that is also delinquent on their mortgage or car or has neither of these payments.
Eventually, if the debts are not paid even when they are in the hands of the collection agency or a third party debt purchaser, you will probably be sued on one or more of the obligations. The Statute of Limitations in New York for the collection of loans and credit cards is six years from the date that you last paid the account. So, even if you have not heard from the creditor for many months or even several years, this does not mean that the debt has gone away. Many of the third party debt purchasers do not commence lawsuits until the fourth, fifth or sixth year, and this may also be the first time that they report the account on your credit report. So, even if your credit score has started to improve slightly because the creditors have not pursued you, you may suddenly experience a significant drop in your credit score when the creditors start more aggressive action.
If you are sued on a debt and do not pay it, this will ultimately result in a money judgment against you. The judgment will appear as a public record on your credit report, and it will remain there for seven to ten years. In theory, an unpaid loan or credit card can remain on your credit report for up to 16 years from the date you last paid it.
Once you get to the point of having active lawsuits or judgments against you, your credit score is probably going to be in the low 500s or maybe the high 400s. If the debts are not addressed, your credit score will remain at a very low level for a number of years. Also, the judgments themselves are enforceable for up to 20 years, and these can result in wage garnishments, bank account restraints and other collection activity. Yes, at some point, your credit score will start to improve even when you have defaulted debts and judgments, but if this is your situation (or you think it could become your situation), you should take action immediately. It makes no sense to wait until your finances continue to disintegrate in order to make the decision about a bankruptcy filing.
Many people filing bankruptcy today obtained their credit cards and personal loans prior to 2008 when the bank’s standards for giving out credit were extremely generous. It was not unusual for an individual to apply online for a credit card and obtain an instant credit line of $10,000 or more without providing any proof of income. If the applicant’s credit score was above a certain number and their debt to income ratio shown on the credit report was reasonable, large credit lines were readily given. However, the days of easy credit are gone forever. Even if you have a credit score of over 700 right now, it is unlikely that you are going to obtain a credit line in excess of a few thousand dollars. Also, the credit card companies are carefully reviewing your total available unsecured credit lines in order to make sure that your access to credit in general is not beyond your ability to repay. So, if your income is $30,000, it is unlikely that any credit card company is going to approve you for a card if your total credit card debt limits are more than $10,000. Even if you do not owe any money on any of those credit lines when you apply, creditors are keenly aware of the possibility of some type of financial setback given the uncertainty in the job market and other factors. Therefore, they have to look at the worst case scenario and assume that all credit lines will be fully utilized. For someone living on $30,000 income, it is unlikely that they could ever repay more than $10,000 in unsecured debt.
My point here is simple. If you handle your credit responsibly, you will be able to obtain credit for things that you truly need within a few years, as long as your income is sufficient to support the debt. However, do your best to learn to live with less rather than more. I promise you that you will be much happier for it, and people around you will come to admire you for your discipline. For every ten people on the road driving a Mercedes or BMW, you can be certain that eight or nine of those people are under significant financial strain, worrying about how they are going to make the car payment at the end of the month.
While a decision to file bankruptcy should never be taken lightly, we do not agree that it should be a “last resort.” This is simply a myth perpetuated by the credit card and financial industry to discourage people from filing bankruptcy. Obviously, if you can pay your debts on time without undue stress, you should certainly do so. However, it is very easy to review a client’s budget to determine whether there is any realistic possibility that they can pay off their debt in the foreseeable future. If a client’s income is barely enough to pay their basic living expenses, then there is simply no possible way that they are going to pay back their credit cards or other debt. This does not mean that the individual wants to stop paying the creditors. It simply means that he or she has no choice because they are always going to pay their mortgage, car payment and other living expenses before making a payment on an unsecured account.
If you know that you have more debt than you can pay, do not simply ignore it. Your stress level is only going to increase when the debt collectors start to call. If this is your situation, bankruptcy is probably the first option you should consider, rather than the last. Yes, it is appealing to watch ads on television that promise to settle your debt for 50% or less of what you owe. Most of these debt settlement programs do not work, and a significant percentage are outright scams. However, if you have no extra money each month to pay your creditors, does it really matter whether you owe $40,000 in debt or a “settled” amount of $20,000? Either way, the debt is beyond your ability to pay. It is extremely rare that we meet a client whose budget is out of whack by just a few hundred dollars a month. In most cases, either the client has the absolute ability to pay all of their debts in full in a very short period of time, or they do not have the ability to pay the debt at all.
A competent and ethical bankruptcy attorney will never encourage a client to file a bankruptcy if their total amount of debt is very low, their credit is good, and it is clear that the client has the ability to pay the debt back over a period of three years or less. Also, the bankruptcy attorney will never coerce or pressure a client to file a bankruptcy. They will simply explain the process to the client and then ask the client to consider the option of bankruptcy carefully before making a final decision.
If you make the decision to file bankruptcy, the immediate impact on your credit score is going to vary significantly depending upon your credit score and other factors on the date that your case was filed. For example, if you have been making all of your credit card payments on time, your credit score may drop more than for someone who already has multiple judgments or collection lawsuits against them. However, a person with a very good payment history before the bankruptcy is likely to see their credit improve much faster than somebody with other types of collection items on their credit report. The bankruptcy, by itself, is only one credit reporting item. Your credit report is based on many factors, including the payment history on your individual accounts. One of the common myths about filing bankruptcy is that your credit score is gong to drop and stay poor forever. This is absolutely not true. In fact, your credit score may drop very little when you file bankruptcy because it may already be so low.
The real question is not how much your credit score will drop with the bankruptcy filing, but rather how quickly will it improve and what steps can you take to make that happen. As indicated above, the person that does not file bankruptcy is likely to have their credit score remain low for many years without any hope of improvement. However, when a bankruptcy is filed and discharged, all of your dischargeable unsecured debt will be eliminated. This does not mean that the prior payment history on the accounts will magically disappear from your credit report. However, it does mean that your credit report will show that the amount actually owed for any of the creditors covered by the bankruptcy discharge is zero. Even in the short run, the elimination of this debt will have a favorable impact on your credit because a potential lender is going to feel much more comfortable loaning money to a person who has no other competing debt each month than to a person who is not paying any of their other creditors at all.
While many people claim to understand the credit reporting and scoring process, the “FICO” scoring system used by the credit reporting agencies is fairly secretive and is constantly changing. It does appear that the credit reporting agencies are not penalizing people as much as they used to for bankruptcy filing. Twenty years ago, the filing of a bankruptcy was a fairly unusual event. However, now it is so common that the credit reporting agencies are giving the bankruptcy considerably less weight than in the past. This is not simply my opinion on the subject. It is based upon publicly available articles and research that can be viewed online.
PAYING EXISTING SECURED DEBT ON TIME
If you have a mortgage, car loan payment, or car lease, it is extremely
important that you make the payments on time each month. Obviously, if you want to keep the asset, the payments must be made. However, there is a big difference between simply making the payments soon enough to protect the home from foreclosure or car from repossession, and making the payment early enough that it positively influences your credit report.
You should always make the required payment prior to the due date. If you cannot, at least be sure to make the payment within 30 days of the due date. This is because any payment made within 30 days will be reported as “on time” on your credit report. Any payment made after 30 days (even one day) may be reported as 30 days delinquent. Your credit rating will start to improve even if you do nothing after the bankruptcy filing. However, if you start to fall behind again on secured payments, your credit score could actually go down due to the new negative information related to the late post-bankruptcy payments. Of course, not everybody has a mortgage or car loan when they file bankruptcy, but for those people with one or more of these loans, paying the loans on time will help boost your credit score.
OBTAIN SECURED CARDS (AND PAY THEM IN FULL EACH MONTH)
While we strongly encourage you to avoid getting yourself into credit card debt, there is a big difference between owning a few credit cards and actually getting yourself into debt. It is perfectly reasonable for you to use a credit card when you go to the grocery store or purchase something online. However, the key is to make sure that you pay the bill in full as soon as you receive it each month. While it is unlikely that you will be able to obtain any unsecured credit for a year or two after the bankruptcy filing, you should have no problem at all being approved for one or more secured credit cards. The reason for this is simple. A credit card company or bank issuing a secured credit card does not take much of a risk because you have to post a security deposit which is equal to the amount of the credit line. If you pay the account on time each month, the creditor may increase your credit line without requiring that you post any additional security deposit. They may also refund the security deposit to you in full.
Most secured credit cards do carry high annual fees, and in some cases, even monthly fees. However, we still encourage you to obtain at least two of these accounts. We also encourage you to use them periodically and, as indicated above, to pay the balance in full. Your payment history on a secured credit card will appear on your credit report, and this should provide a significant boost to your credit score. If you carry balances on the accounts, the improvement on your credit score may not be as significant because there are actually three aspects (and probably more) as to how a credit reporting agency reviews the use of credit card debt. The three aspects are as follows:
1) The total amount of your credit lines. The higher your credit lines, the more favorably your unsecured credit profile is viewed by the credit reporting agencies. Obviously, it is going to be some time until you have significant credit lines, but even if you build up lines of a few thousand dollars, this should help.
2) Your payment history. As with car loans and mortgages, you must pay your credit card bills on time every month. Whether you pay them in full or just in part, the credit reporting agency will show the payment as an “on time” payment.
3) Your available credit ratio. Although it will certainly help your credit score if you have credit cards that are paid on time, it is also very important that you not utilize too much of the credit line. In recent years, the credit reporting agencies have started to give more weight to the ratio between the total credit line and the available credit line. For example, if you have $5,000 in credit lines and you owe $4,500, you may be viewed as a poor credit risk because of your dependence on the unsecured credit. On the other hand, if you only owe $500 against the same $5,000 in credit limits, then the reporting agencies will correctly assume that you are using your credit in a responsible way and that you are not getting yourself into more debt than you can afford to pay.
So, paying your credit card bills in full each month is not only good for your financial well being but is also very good for your credit score.
STRAIGHTEN OUT STUDENT LOANS
It is becoming increasingly more common to meet clients who have student
loans that are in default when they file the bankruptcy case, and, as I explained earlier, student loans are not dischargeable in a bankruptcy except in a very small percentage of cases.
Even if you are not being hounded by the student loan company to make up these delinquent payments, remember that all student loans (or at least most) are reported to the credit reporting agencies each month. Therefore, if your student loan is in default, it will continue to show on your credit report as a default until either you catch up on the payments or negotiate some new arrangement with the student loan company.
Student loan companies can be quite flexible in negotiating with people that are in bankruptcy or about to exit a bankruptcy case. During the actual bankruptcy process, even student loan companies cannot pursue you for payment. However, as soon as the bankruptcy is concluded, collection activity can resume. We always recommend that a client that has a defaulted student loan attempt to work out a new payment arrangement with their student loan company as soon as they file the bankruptcy. Many times the lender will show much more flexibility to a client in bankruptcy than one who is not.
The goal is to reach a settlement with the student loan company that will “re-age” the account in such a way that it starts to show as being paid on time on your credit report. You may be able to work out a deferment on the student loan with positive credit reporting. You may also be able to work out an “income sensitive” repayment that ties your monthly payment to your income. Any deal that you can strike with the student loan company will help you not only in avoiding aggressive collection action down the road, but also in improving your credit score by turning the default status into an on-time status.
Do not ignore the status of your student loans. They are just as important to your credit as most other types of debts, and with a little hard work, you will probably be able to work out a deal that is satisfactory to both you and the student loan company.
PAY ALL NEW DEBTS ON TIME
Even a small, unpaid medical bill or utility bill can cause significant damage to your credit rating. Generally, only certain types of debts appear on your credit report when they are being paid on time. The main debts are: mortgages, car loans, credit cards and student loans. Utility companies and other household expense creditors do not report your monthly activity to the credit reporting agencies. However, an unpaid utility bill or medical bill often ends up in the hands of a collection agency. This may well get reported on your credit report by the collection agency. Even a $30 parking ticket can eventually end up as a collection item on your credit report, and this can do significant damage to your credit report. It is very common for people to let medical bills “sit around” for a few months and pay them only when the creditor starts becoming more aggressive or turns it over to a collection agency. While, of course, it is a good thing to pay the debt, paying it after it has already been turned over to a collection agency may be too late to reverse the credit damage. Once the item has been added to your credit report, some credit damage will remain.
DON’T APPLY FOR CREDIT TOO OFTEN
Obviously, if you need to apply for a mortgage or car loan, you should go
ahead and do so. However, do not submit the application until you are absolutely certain that you are ready to make the purchase. The credit reporting agencies penalize people for applying for credit too often. This is probably because the agencies feel that people who are applying for credit regularly are attempting to live beyond their means and may be incurring debts that they cannot really afford to pay.
You will probably not be penalized if you apply for the same type of credit in a very short period of time. For example, if you submit credit applications to three separate banks for an automobile loan within a couple of days, this is likely to be treated as only one credit inquiry. However, if you apply for the same car loan once a month for three separate months, this will definitely impact your credit.
GET A CO-SIGNER
It is actually easier than most people think to obtain automobile loans and even mortgages after the filing of the bankruptcy case. Typically, people have to wait until about two years after the bankruptcy discharge to qualify for most secured loans. However, there is no question that the interest rate paid by a person with a recent bankruptcy on their credit report will be much higher than the rate paid by somebody with good credit. This is where a co-signer can make all the difference.
Not only will a co-signer make it more likely that the loan will be approved, but it will also help you to obtain much better terms than you might otherwise receive. The creditor will likely base the interest rate on the co-signer’s credit rather than yours. This is because they know that the co-signer is likely to pay the debt even if you do not. Of course, you should not ask anyone to co-sign a debt if you are not absolutely certain that you will be able to make payments. However, most people are able to convince a family member or a friend to co-sign a debt, and if you are fortunate enough to have somebody to help you in this capacity, do not be shy about asking them. It will cost them absolutely nothing, but it will save you potentially hundreds or thousands of dollars in interest charges, and it will positively impact your credit report if the obligation is paid on time.
BECOME AN AUTHORIZED USER
ON SOMEONE ELSE’S CREDIT CARD
If you are an authorized used on someone else’s credit card, it is probable that the credit card company will start to report the payment status of the account on your credit report. Technically, as an authorized user, you are assuming responsibility for any charges that you actually incur on the account. As a result, it is common practice for the credit card companies to report the monthly payment activity on the account on your credit report. It may not necessarily matter whether you actually use the account, though using it and paying it off each month could help. Simply having the account in your name is sufficient.
There are a few caveats to keep in mind. First, not all credit card companies will report the activity of an authorized user’s card. You should probably have the main card holder check with their credit card company on this issue before they go through the trouble of adding you to the account.
Second, you should be certain that the person who owns the account is in good standing with the credit card company. Any missed payments by the principal card holder could appear on your credit report. Also, if the main card holder misses any payments, this could be reported on your credit report as well. There are obviously risks for both the main card holder and the authorized user. Obviously, the main card holder must have sufficient trust in the authorized user to place him/her on the account, knowing that they will be responsible for any unpaid charges incurred by the authorized user. By the same token, the authorized user must trust the main card holder to keep the account in good standing.
Third, it is important that you do not add yourself as an authorized user on any credit card account that is already “maxed out.” Remember, even if a credit card account is paid on time, the credit reporting agency will heavily weigh the amount of debt against the available credit. It is extremely helpful to your score to show a large credit line with very little of the line being utilized. It is not helpful to show a credit line with no available credit.
If you have a family member or friend that is willing to assist you as an authorized user, it is important that you discuss all of these issues with him or her beforehand. It only makes sense to become an authorized user if you are certain that the primary card holder is using their credit in a responsible manner and you have no reason to believe that the situation is going to change in any dramatic way in the future.
REVIEW YOUR CREDIT REPORT FOR ERRORS
The filing of your bankruptcy will remain on your credit record for ten years. However, as we discussed above, this is only one of many items that affects your credit score. In order to minimize the damage that the bankruptcy has on your credit rating, you should verify that each individual line item of your credit report is properly updated as a result of the bankruptcy filing. Here are a few things to look for:
1. All debts discharged in your bankruptcy should be displayed with a zero balance. The credit report will continue to show each individual account for up to seven years from the date of the initial default. However, the report should indicate that the balance was discharged as a result of the bankruptcy and that there is no further money owed to the creditor. This is not something that you should expect the credit reporting agency to pick up on its own. In theory, the individual creditor should report the discharge of the debt as a result of the bankruptcy, but as you can imagine, this is not on the top of any creditor’s agenda. It is very likely that one or more of the creditors will still show a balance owed even after the bankruptcy filing. This will definitely hurt your credit score because the credit reporting agency will essentially pick up the debt as an ongoing obligation with a delinquent status.
2. Collection items and public records should show a zero balance. If you have a judgment entered against you prior to the bankruptcy, the underlying debt will be automatically discharged in your bankruptcy case, unless the judgment relates to some type of non-dischargeable debt, such as a child support obligation. However, most judgments relate to items such as credit cards, medical bills, or utility bills. While your credit report will continue to show that the judgment was entered, it is important to follow up to confirm that the balance is shown as zero once the bankruptcy is discharged. Again, this is not something that the credit reporting agency will necessarily do on its own. You will have to follow up with each credit reporting agency. (Remember, the elimination of the debt does not necessarily mean that the judgment lien is removed. However, there is a procedure available in most cases to remove any judgment liens that affect your homestead and even other types of property. Please be sure that we are aware of any judgments against you so that we can handle the liens while your bankruptcy case is open.)
As with judgments, collections items will also continue to be reported, but if the debt was discharged in your bankruptcy the collection item should show as a zero balance. While any knowledgeable lender reviewing your credit report can verify whether a debt pre-dates your bankruptcy filing, the concern here is not whether you owe the debt but rather that your credit report properly reflects the status of the account. You certainly do not want your credit score hurt because an old collection item is still appearing in error.
3. There should be no new negative reporting on discharged debts. Although there is nothing that you can do to remove the negative reporting for a particular creditor prior to the bankruptcy, no creditor is allowed to add derogatory information to your credit report subsequent to the bankruptcy filing date for a covered debt. So, for example, if you have a Sears credit card debt and you filed bankruptcy on January 1, 2010, then Sears cannot report that you were late on payments for February 2010 or any months thereafter. It is quite common for the creditors to continue to report the delinquent status of a discharged debt even after the bankruptcy filing date. Even if the balance shows as zero, any ongoing negative, monthly reporting could adversely impact your credit score. Obviously, for debts that survive the bankruptcy, such as student loans, vehicles, and mortgages, the creditor can and will report how you pay the debt after the bankruptcy filing. However, for discharged debts, the date of the bankruptcy filing should be the last date of any active reporting.
How to Fix Your Credit Report
We are often asked by our clients whether we will fix their credit report for them. Our response is that fixing your credit report does not require an attorney and is really quite simple as long as you point out in detail to the agency what you are disputing.
The following is the current contact information for the three major credit reporting agencies:
Equifax Credit Information Services
P.O. Box 105873
Atlanta, GA 30348
Experian (formerly TRW)
P.O. Box 2002
Allen, TX 75013-2002
Consumer Relations Center
P.O. Box 1000Chester, PA 19022
800-888-4213 OR 440-779-7200
Do not simply send a letter to the credit reporting agency stating that your credit report is wrong or that the bankruptcy is not properly being reflected. Your letter to the agency should specify each particular item that you are disputing and should tell the agency exactly the way you believe the item should be reported. If you have 10 different items that you think are improperly reported, you should separately list each of these 10 items.
Also, remember that sending a dispute to one credit reporting agency is not going to impact the credit reports that you have with other agencies. You will have to submit the same request to each reporting agency because you never know which report will be reviewed by a prospective creditor.
Once you submit the dispute, the credit reporting agency will contact the creditor, and if that creditor does not respond within 30 days, the agency is supposed to update the information. However, do not assume that the credit reporting agency will necessarily agree with all of the “corrections” I have suggested above. Even now, there is still some uncertainty regarding the proper way that debts should be reported as a result of a bankruptcy. There are certainly court decisions confirming some of the points that I have addressed above, but there is no universal law or ruling on the topic. Most of the items will be properly addressed if you bring them to the attention of the credit reporting agency. The more errors that are corrected, the better.
We caution all clients against hiring any outside company that claims that they will be able to fix your credit or improve your credit score. There is no “magic fix” to your credit report. If you follow all of the steps outlined above, your credit will improve. You do not need an outside company or a lawyer to address problems on your credit report. You are certainly capable of handling this on your own.
We try to encourage every client to think of the bankruptcy process as a beginning rather than an end. We are all fortunate to live in a society in which bankruptcy exists. While some people feel that the bankruptcy laws are unfair, most people would much prefer to live in a country that is a little too generous rather than too strict. Just think of the laws in other countries regarding non-payment of debts. In some countries, you can still be sent to jail for not paying your bills. Even in some European nations, creditors have almost unfettered discretion to taunt and embarrass you into paying your debts.
It is still my firm belief that bankruptcy does not really hurt the economy. When bankruptcies increase, this should be a warning sign to lenders in general to tighten their standards. When bankruptcies decrease, it probably means that the banks have become too strict in their criteria. I have little sympathy for lenders who give out credit without verifying the credit-worthiness of the prospective borrower. Much of the debt incurred by Americans over the past decade was based on extremely poor lending criteria. While many people probably realize that they are getting in over their heads when they use their credit cards, many others probably believe that their use of the credit card is justified. They assume that, if they were given the credit line, the creditor has made a determination that they can afford to incur the debt and pay it each month. People should, of course, scrutinize their budget from time to time, but the truth is that most bankruptcies are not caused by overspending but rather some type of unanticipated, major life event.
If you are experiencing stress because of debt problems, we strongly encourage you to contact our office. After reading this guide, you should have a pretty good idea about whether bankruptcy is right for you and how the process works. However, each person’s situation is different, and sometimes, the only way to make a difficult decision, such as the need for a bankruptcy filing, is to meet with someone who can give you objective advice about your situation. If your physical health were in question, you would not likely hesitate before seeing a doctor to figure out what is wrong. In some ways, your financial health is as important as your physical health. Just think of all the ways in which financial stress can directly impact your health. Depression, high blood pressure, hypertension, and insomnia are just a few examples. Also, think about how much strain your debts may be placing upon your relationship with your spouse, children, family, and friends.
If you are still “on the fence” about whether bankruptcy is right for you, we encourage you to contact us. You can send us an e-mail anytime with specific questions or you can call to set up a formal, free consultation to discuss your case.